Federal government lost $9.26B on auto rescue - The Detroit News

In its report, the U.S. Treasury Department said it recovered $70.43 billion of the $79.69 billion it gave to General Motors Corp., Chrysler LLC and auto lending arms Ally Financial Inc. and Chrysler Financial. The government was repaid through a combination of stock sales, partial loan repayments, dividends and interest payments.(Photo: PAUL J. RICHARDS / AFP/Getty Images)

Washington — The U.S. government lost $9.26 billion on the auto industry rescue, according to the final accounting released late Monday.

In its report, the U.S. Treasury Department said it recovered $70.43 billion of the $79.69 billion it gave to General Motors Corp., Chrysler LLC and auto lending arms Ally Financial Inc. and Chrysler Financial. The government was repaid through a combination of stock sales, partial loan repayments, dividends and interest payments.

The books are closed on the program because the Treasury, on Dec. 19, sold its final 11.4 percent stake in Ally, the Detroit-based auto lender and bank-holding company formerly known as GMAC. The bailouts began in December 2008 under President George W. Bush with $25 billion in aid to GM, Chrysler and their lending arms. President Barack Obama added about $55 billion to the total.

"We've now repaid taxpayers every dime and more of what my administration committed, and the American auto industry is on track for its strongest year since 2005," Obama said at a press conference that day.

Under government accounting rules, the U.S. Treasury actually lost $16.56 billion on paper on the auto bailout. As tallied under those rules, taxpayers lost more because interest and dividends paid by borrowers — in this case, the automakers and finance companies — aren't applied toward the principal owed.

A homeowner, for example, who borrows $100,000 doesn't get credited with interest payments in paying off the mortgage. That largely explains the difference between the government's larger accounting loss and the $9.26 billion net loss. In the case of GM and Ally, the government swapped most of what it was owed for stock in the companies. More than $7 billion recovered was in the form of dividends and interest payments.

The government recouped $19.6 billion on the $17.2 billion Ally bailout — $2.4 billion more than it invested. But it recovered just $39 billion of the $49.5 billion given to GM; and $10.67 billion of the $11.96 billion that went to Chrysler.

Still, the government's losses were far less than the Obama administration originally feared. In early 2009, it projected a loss of $44 billion — an estimate it reduced to $30 billion in December 2009.

In 2010, the Treasury proposed creating a new tax on large banks to pay for losses from the $700 billion bailout program, but Congress hasn't agreed to approve it. It would raise $90 billion over 10 years. Then-Treasury Secretary Timothy Geithner told Congress in May 2010 the Obama administration didn't think "it was necessary or appropriate" to apply the tax to the automakers.

The Treasury Department declined to comment on the report Monday.

In December 2013, the Treasury sold its final shares in GM. The Treasury ended its ownership stake in Chrysler Group LLC in July 2011, incurring a $1.3 billion loss on a $12.5 billion bailout. Chrysler — part of Fiat Chrysler Automobiles NV — returned to trading on the New York Stock Exchange on Oct. 13.

The Ann Arbor-based Center for Automotive Research and others have argued that government losses paled in comparison to the impact that would have followed a collapse of GM and Chrysler. That could have sent much of the U.S. auto supplier sector reeling as well. A December 2013 study said failure of GM could have sacrificed 1.2 million U.S. jobs, cut personal income by $79.5 billion and eliminated $17 billion in income taxes and Social Security taxes in 2009. It could have also boosted government spending by $6.5 billion.

Others have estimated fewer job losses connected with a failure of GM and Chrysler. The biggest unknown remains if — and how long — it would have taken surviving automakers like Ford Motor Co. and other foreign firms to make up the lost production from GM and Chrysler. Ford did not take a government bailout.

Also unknown is if U.S. auto suppliers could have survived the massive disruption of a collapse of GM or Chrysler. Former auto czar Steve Rattner said that the disappearance of GM could have pushed the state of Michigan into bankruptcy. Another big cost would have been the likely assumption of GM and Chrysler's underfunded pension plans by the Pension Benefit Guaranty Corp., the government-owned pension insurer.

Treasury Secretary Jack Lew told reporters before Christmas that the overall $700 billion Troubled Asset Relief Program — which was used to rescue banks and a major insurance company, AIG, in addition to GM and Chrysler — will make money overall.

Lew said that in total, the government invested $426.4 billion in the bank, auto and insurance bailout package, and recovered $441.7 billion. But under government accounting rules, Treasury has had $35 billion in losses.

"At the peak, more than 700 institutions were in the TARP bank program. Today just 35 remain," Lew said.

The industry rescue became a key part of Obama's re-election and remains a staple of the president's speeches.

"This program was a crucial part of the Obama administration's effort to ... protect the economy from slipping into a second Great Depression," Lew told reporters. "This program worked."

Read or Share this story: http://detne.ws/1zs3vho

Source : http://www.detroitnews.com/story/business/autos/2014/12/29/federal-government-lost-auto-bailout/21019899/

Auto Industry Galvanized After Record Recall Year - New York Times

By BILL VLASIC and HILARY STOUT

December 30, 2014

DETROIT — Spurred by a decade-old ignition-switch defect in millions of General Motors vehicles, the auto industry this year has issued more recalls involving old models — those made five or more years ago — than ever before, an analysis of federal recall records by The New York Times shows.

More than 60 million vehicles have been recalled in the United States, double the previous annual record in 2004. In all, there have been about 700 recall announcements — an average of two a day — affecting the equivalent of one in five vehicles on the road.

The eight largest automakers have each recalled more vehicles in the United States this year than they have on average since 1966, when data collection began, with G.M., Honda and Chrysler each setting corporate records, the review by The Times found.

While automakers are cleaning up years of defects that previously went undetected or ignored, driving has become statistically safer, partly because of added technology in newer vehicles. Yet the lapses of the past cover a wide range of parts used in multiple models, driving up the number of recalls.

Interactive Feature | A Record Year for Auto RecallsMore vehicles, including old models, have been recalled in the United States this year than ever before. Explore the size and scope of the recalls, and find out if your car has been affected.

The G.M. ignition switch defect, affecting various models between 2003 and 2011, has been linked to at least 42 deaths.

"What you're seeing is the makeover of the entire industry," said Bob Carter, Toyota's senior sales executive in the United States.

The auto industry's intense focus on neglected safety issues has changed the way it approaches even the most basic safety practices.

Like most automakers, Toyota routinely notifies car owners of safety recalls with the minimum legal requirement of mailing a first-class letter.

But in recent months, the automaker has taken the unusual measure of hiring outside companies to track down owners of vehicles equipped with defective airbags that can explode. The contractors have been instructed to make direct contact with the owners by telephone.

"Sending out letters just isn't enough anymore," Mr. Carter said. "We need to call the consumer and explain the importance of getting their cars repaired."

The attention to safety has also awakened car owners. The National Highway Traffic Safety Administration, the nation's top auto regulator, is on pace this year to receive 80,000 complaints from consumers about possible defects — about double the average annual number.

"I keep getting recall letters as I'm waiting for one thing and no parts available for another," a driver of a 2013 Dodge Durango complained to safety regulators this month. "How is one supposed to feel safe, knowing my car can 'stall without warning,' have an 'under hood fire' or have my 'brakes fail' at any moment?"

David Friedman, who has served as N.H.T.S.A.'s temporary chief this year, said in an interview that the agency, which has been criticized by lawmakers for being too lenient with automakers, had put the industry on notice that problematic vehicles needed to be identified and repaired more quickly — or automakers will risk maximum punishment.

To that end, Mr. Friedman held individual conferences with executives of a dozen car companies last summer. Before the meetings, he urged them to read an internal report on G.M.'s ignition-switch problems to understand the consequences when a company neglects to fix a deadly defect, he said.

"There were some clear lessons learned that I wanted to make sure every automaker knew regarding the poor way G.M. handled this," he said.

G.M. has led the pack in cleaning up problems, issuing about 80 recalls covering more than 26 million vehicles, including 2.2 million small cars with the defective ignition switches.

Interactive Feature | G.M. Recalls: Crisis in Auto SafetyThe New York Times has exposed missteps and delays by automakers and federal safety regulators in responding to deadly defects in automobiles during what has become a record year for recalls.

Honda commissioned an outside audit that found it had underreported deaths and injuries in accidents to regulators, and the company promised organizational and staffing changes to better comply with federal laws.

Fiat Chrysler, which is recalling Jeeps with gas tanks that can catch fire in a high-speed collision, created a new department overseeing vehicle safety led by a senior executive.

Toyota overhauled its safety practices a few years ago after a spate of recalls for unintended acceleration resulted in a criminal penalty in March of $1.2 billion, the largest ever for a carmaker in the United States. Still the company this year has had to take further steps to improve its recall rates on vehicles with defective airbags made by the supplier Takata.

Even auto suppliers are scrambling to revise contracts with carmakers to clarify responsibility for parts that turn out to be defective.

"They're scared," said Thomas Manganello, a Detroit lawyer who represents supplier firms. "The concern is they are building to the automaker's specifications, and then being held liable."

While G.M. has spent billions of dollars fixing recalled cars and setting up a fund to compensate ignition-switch accident victims and their families, the company has had to take extreme measures to restore trust in its products and management.

G.M. has reorganized its sprawling engineering organization and centralized all safety functions under a new vice president, Jeff Boyer.

In his first extensive interview on G.M.'s new direction, Mr. Boyer said that a hundred people had been added to his safety team, including 35 product investigators.

The biggest change, he said, was the close involvement of executives in monitoring safety investigations, potential recalls and repairs.

"We have executive leadership defined at each phase of the process," Mr. Boyer said, adding that he regularly updates Mary T. Barra, the chief executive, as well as the G.M. board on any active safety issues.

As far as consumers are concerned, Mr. Boyer said G.M. is reaching out to owners of recalled vehicles by letter, email, social media and phone banks. "We need to make sure we reach out in the most effective way possible," he said.

The G.M. crisis, in particular, has prompted concern in Washington that carmakers have become lax on safety, combative with regulators and insensitive to consumers.

After seven congressional hearings and, in G.M.'s case, multiple continuing state and federal investigations, some lawmakers say they are convinced that only stiffer fines and the threat of criminal prosecution will motivate companies to make safety a top priority.

"What we have seen is a lack of sufficient incentives for companies to correct safety defects and act responsibly," said Senator Richard Blumenthal, Democrat of Connecticut.

G.M. has already been fined $35 million by the government for its failure to address the faulty switches, and it remains under investigation by the Justice Department, the Securities and Exchange Commission and 47 state attorneys general. Separately, the attorney general of Arizona filed suit against the automaker in November, claiming it had defrauded consumers in that state of $3 billion.

And even with its internal changes, the company's reputation for quality and safety will take years to rebuild. "G.M. has changed on the surface, but it has yet to walk the walk," Mr. Blumenthal said.

It is unclear how much bipartisan support will emerge in Congress for new safety laws that, among other things, could hold auto executives criminally liable for deliberately concealing safety defects.

Mr. Blumenthal said he planned to introduce four sweeping auto safety bills in the next legislative session in response to the year's crises. But Representative Fred Upton, Republican of Michigan, who led the House investigative hearings on G.M., said legislative solutions cannot be "quick fixes," and stressed the need for stricter enforcement by N.H.T.S.A. of existing regulations.

"Whatever changes Congress makes, the federal agency that serves as the public's watchdog must be vigilant," he said.

One safety advocate suggested that the government mandate completion rates of 85 percent on recalls, a marked improvement over the average industry rate of about 70 percent.

"The only way we are going to get the recall rates to go up is to force the companies to do more," said Sean Kane, president of the firm Safety Research and Strategies.

Improved technology could play a larger role in reaching consumers about recalls.

Analysts said automakers would soon be able to transmit recall information directly to cars on the road. N.H.T.S.A. introduced an app this spring for Apple and Android phones that allows users to enter the make, model and year of their vehicle and receive recall notifications directly from the government.

N.H.T.S.A. is expected to bolster its own investigative efforts with additional personnel to handle the rising number of vehicle complaints from consumers.

And while Mr. Friedman is soon to be replaced by a new, full-time administrator, he says he delivered a blunt message on how the government will police automakers that fail to live up to what he called "the new normal" in safety practices.

"At the end of the day, we are going to judge you by actions, not words," he said he told the auto executives during his meetings over the summer. "If you fail to live up to the new normal, we will hold you accountable."

Bill Vlasic reported from Detroit and Hilary Stout from New York. Danielle Ivory and Rebecca R. Ruiz contributed reporting from New York.

Source : http://www.nytimes.com/2014/12/31/business/a-year-of-record-recalls-galvanizes-auto-industry-into-action.html

Federal government lost $9.26B on auto rescue - The Detroit News

In its report, the U.S. Treasury Department said it recovered $70.43 billion of the $79.69 billion it gave to General Motors Corp., Chrysler LLC and auto lending arms Ally Financial Inc. and Chrysler Financial. The government was repaid through a combination of stock sales, partial loan repayments, dividends and interest payments.(Photo: PAUL J. RICHARDS / AFP/Getty Images)

Washington — The U.S. government lost $9.26 billion on the auto industry rescue, according to the final accounting released late Monday.

In its report, the U.S. Treasury Department said it recovered $70.43 billion of the $79.69 billion it gave to General Motors Corp., Chrysler LLC and auto lending arms Ally Financial Inc. and Chrysler Financial. The government was repaid through a combination of stock sales, partial loan repayments, dividends and interest payments.

The books are closed on the program because the Treasury, on Dec. 19, sold its final 11.4 percent stake in Ally, the Detroit-based auto lender and bank-holding company formerly known as GMAC. The bailouts began in December 2008 under President George W. Bush with $25 billion in aid to GM, Chrysler and their lending arms. President Barack Obama added about $55 billion to the total.

"We've now repaid taxpayers every dime and more of what my administration committed, and the American auto industry is on track for its strongest year since 2005," Obama said at a press conference that day.

Under government accounting rules, the U.S. Treasury actually lost $16.56 billion on paper on the auto bailout. As tallied under those rules, taxpayers lost more because interest and dividends paid by borrowers — in this case, the automakers and finance companies — aren't applied toward the principal owed.

A homeowner, for example, who borrows $100,000 doesn't get credited with interest payments in paying off the mortgage. That largely explains the difference between the government's larger accounting loss and the $9.26 billion net loss. In the case of GM and Ally, the government swapped most of what it was owed for stock in the companies. More than $7 billion recovered was in the form of dividends and interest payments.

The government recouped $19.6 billion on the $17.2 billion Ally bailout — $2.4 billion more than it invested. But it recovered just $39 billion of the $49.5 billion given to GM; and $10.67 billion of the $11.96 billion that went to Chrysler.

Still, the government's losses were far less than the Obama administration originally feared. In early 2009, it projected a loss of $44 billion — an estimate it reduced to $30 billion in December 2009.

In 2010, the Treasury proposed creating a new tax on large banks to pay for losses from the $700 billion bailout program, but Congress hasn't agreed to approve it. It would raise $90 billion over 10 years. Then-Treasury Secretary Timothy Geithner told Congress in May 2010 the Obama administration didn't think "it was necessary or appropriate" to apply the tax to the automakers.

The Treasury Department declined to comment on the report Monday.

In December 2013, the Treasury sold its final shares in GM. The Treasury ended its ownership stake in Chrysler Group LLC in July 2011, incurring a $1.3 billion loss on a $12.5 billion bailout. Chrysler — part of Fiat Chrysler Automobiles NV — returned to trading on the New York Stock Exchange on Oct. 13.

The Ann Arbor-based Center for Automotive Research and others have argued that government losses paled in comparison to the impact that would have followed a collapse of GM and Chrysler. That could have sent much of the U.S. auto supplier sector reeling as well. A December 2013 study said failure of GM could have sacrificed 1.2 million U.S. jobs, cut personal income by $79.5 billion and eliminated $17 billion in income taxes and Social Security taxes in 2009. It could have also boosted government spending by $6.5 billion.

Others have estimated fewer job losses connected with a failure of GM and Chrysler. The biggest unknown remains if — and how long — it would have taken surviving automakers like Ford Motor Co. and other foreign firms to make up the lost production from GM and Chrysler. Ford did not take a government bailout.

Also unknown is if U.S. auto suppliers could have survived the massive disruption of a collapse of GM or Chrysler. Former auto czar Steve Rattner said that the disappearance of GM could have pushed the state of Michigan into bankruptcy. Another big cost would have been the likely assumption of GM and Chrysler's underfunded pension plans by the Pension Benefit Guaranty Corp., the government-owned pension insurer.

Treasury Secretary Jack Lew told reporters before Christmas that the overall $700 billion Troubled Asset Relief Program — which was used to rescue banks and a major insurance company, AIG, in addition to GM and Chrysler — will make money overall.

Lew said that in total, the government invested $426.4 billion in the bank, auto and insurance bailout package, and recovered $441.7 billion. But under government accounting rules, Treasury has had $35 billion in losses.

"At the peak, more than 700 institutions were in the TARP bank program. Today just 35 remain," Lew said.

The industry rescue became a key part of Obama's re-election and remains a staple of the president's speeches.

"This program was a crucial part of the Obama administration's effort to ... protect the economy from slipping into a second Great Depression," Lew told reporters. "This program worked."

Read or Share this story: http://detne.ws/1zs3vho

Source : http://www.detroitnews.com/story/business/autos/2014/12/29/federal-government-lost-auto-bailout/21019899/

The 5 wackiest cars seen at 2014 auto shows - USA TODAY

Show Thumbnails

Show Captions

Last SlideNext Slide

Honda's N-Box Slash just went on sale in Japan.(Photo: Honda)

LOS ANGELES — Sure, there were plenty of beautiful cars and prototypes at this year's Los Angeles Auto Show. But there was also Toyota's I-Road, one of a handful of goofy cars that turned up at auto and trade shows around the world.

For every serious model or swoopy, elegant concept, automakers have figured out they can draw lots of attention by sometimes showing how wild or fanciful they can be. They let their designers' imaginations run wild without regard to practicality or real-world acceptance. Our favorite? The Renault that carries a built-in hangar so it can release a flying drone with a video camera to scout traffic ahead.

Here are our favorite way-out concepts — including one production model — that made appearances at auto shows and consumer shows around the world during the past year:

• Toyota i-Road. For the ultimate in personal transportation, Toyota showed off its i-Road here. The three-wheeler holds only a single person making it highly maneuverable. The entire vehicle cants, leaning into a turn. Its small size makes it perfect for wheeling through tight city streets, even though you can't carry many grocery bags. It's a concept, so don't look forward to seeing one down the block anytime soon.

• Honda N-Box Slash. Honda put this funny-looking boxy vehicle with an equally strange name on sale in Japan last week. It's perfect for Japan, putting a premium on inside space while having tiny wheels and engine. Even though its looks aren't particularly American, it's being offered in styles meant to evoke America, like a red-and-white "California Diner Style" or a music-themed "Tennessee Session Style." Though the model may look cheap, it can be ordered with a killer sound system.

• Hyundai Intrado. As seen at the Geneva Motor Show earlier this year, Hyundai Intrado isn't bad looking. It's just a tiny bit strange with those weird flares around the fenders and lower body. It's meant to be a concept for a fuel-cell car. Here's what Car and Driver said about it: "Other than some styling cues that vaguely recall the new-for-2015 Genesis luxury sedan, the funky Intrado — so named after the underside of a wing, which helps create lift — looks like no current Hyundai product. Its three-door body mimics the proportions of the Porsche Macan, and its taillamps look suspiciously inspired by the aforementioned (Nissan) Juke's." It goes on to talk about the car's "clunky-looking body sides and high stance."

• Renault KWID. How many cars can boast of being capable of releasing their own video drone from a rooftop hangar? The KWID, developed by Nissan as a concept seen at the Delhi Auto Expo in India, has what it calls the "flying companion." The idea is that while you're struck in traffic, you can send your drone ahead to scout for better routes. The KWID is a two-wheel-drive car that's meant to look like a four-wheel offroader. If that sounds strange, consider the "bird's nest" lattice work on the seats inside.

• Kia Niro. Kia brought its Niro concept to the Chicago Auto Show, an eye-catching little crossover that's actually pretty cool. It's aimed at urban hipsters and has interesting upward opening doors. It rides on 20-inch wheels.

Read or Share this story: http://usat.ly/1B1zXve

Source : http://www.usatoday.com/story/money/cars/2014/12/30/auto-show-concept-cars-strange-outball-wacky/21038399/

Massive Recalls Give The Auto Industry An Unwanted Record - NPR

3 min 59 sec

General Motors CEO Mary Barra testifies before a Senate panel July 17 at a hearing about auto safety recalls. Brendan Smialowski/AFP/Getty Images hide caption

itoggle caption Brendan Smialowski/AFP/Getty Images

More than 60 million cars, trucks and SUVs have been recalled this year — nearly twice the previous record. That translates to nearly 1 out of every 4 cars on the road recalled for a safety-related defect.

But analysts say those recalls say more about the way the industry has restructured than about overall car safety.

When it comes to recalls, none of the major carmakers was spared. Among them, the heads of General Motors and Takata, a key air bag maker, publicly apologized for the tens of millions of recalled vehicles for which their companies were responsible. And Toyota was fined $1.2 billion in a federal investigation into unintended acceleration of some of its vehicles.

"I'm personally wondering which vehicles weren't recalled this last year," says Jake Fisher, head of the auto testing lab at Consumer Reports. "You have so many recalls, it really erodes confidence to normal consumers. And you have to try to figure out, what does this mean? Why are there so many recalls?"

Fisher says it doesn't mean that cars are less safe because there were way more recalls this year.

It's actually the opposite.

"We have reliability data going back many years, and actually today's cars are safer than they ever have been," Fisher says. "What this is means is more scrutiny of these vehicles. And if there are problems, they're trying to attack them with a lot more attention than they ever have before."

Consumer confidence may have been eroded in part because the recalls this year were pretty dramatic.

The GM problem was with an ignition switch that affected several models. If you just bumped the keys with your knee you could shut the car off.

And some of Takata's air bags — which are used by BMW, Ford, Honda and several other automakers — can explode with too much force, sending shrapnel flying at car occupants.

Larry Dominique, a former engineer at Nissan now working at TrueCar, says the recalls in part reflect growing pains after decades of consolidation in the auto industry.

"On the supplier side of the industry and also on the manufacturers using a single supplier for a large number of parts or at least a part for a large number of vehicles," he says. "So now what happens if you do end up with a defect of some sort, the multiplier effect is much much greater."

Because there are fewer suppliers, one bad part could affect the entire industry. That one bad part could send millions of car owners running to a car dealer like Bill Fox, who runs a group of dealerships in upstate New York and is the incoming chairman of the National Automobile Dealers Association.

"It's a burden; it's a real burden. Anytime somebody doubles your workload, it creates problems," he says. "It makes me wonder if all recalls are created equal. The fact is many of these recalls are being branded safety recalls when in my eyes they may not be."

Fox says he thinks a lot of the recalls were made with an overabundance of caution, which makes him worry whether customers will actually get their cars fixed.

Sean Kane, a safety advocate and researcher, says all the recalls are the culmination of years of neglect by manufacturers and the agencies that regulate them.

"I think what's really troubling is that it shows that our system of enforcement and the manufacturers' ability to deal with these problems on their own has been pretty poor," he says.

A glaring example, Kane says, is the way to tell customers about recalls — you get a notice in the mail.

"We don't have regulations to address the complex electronic systems in today's vehicles," he says. "And on the flip side of that, these increased recalls we're not dealing with in a 21st century way. We're still dealing with them by post office and that doesn't make a lot of sense."

Kane says we have an indicator light tell us when the oil needs changing, so why not mandate one for when your car has been recalled?

Source : http://www.npr.org/2014/12/29/373822312/massive-recalls-give-the-auto-industry-an-unwanted-record

The best of times, and worst of times, for America's auto industry - Washington Post

Photographer: Patrick T. Fallon/Bloomberg

Wave goodbye to a banner year for America's auto industry. Six years after the federal bailout saved it from driving off a cliff, the nation's car-and-truck economy has rebounded with supercharged sales, innovative new upgrades — and even rosier forecasts for the year ahead.

New vehicle sales rose 6 percent this year, and U.S. carmakers are set to sell more than 16 million vehicles, the most since 2006. The economy is improving, more people have jobs and hopeful drivers are finding easier access to low-interest loans. The cherry on top: Gas prices' worldwide freefall, which has made it cheaper, easier and more enticing to get out and drive.

Though some automakers spent the year offering lower prices in hopes of winning over lifetime drivers, most won better business for leading vehicles like crossovers, trucks and SUVs without depending on steep discounts. The average new car or truck sold for $31,831, a 2 percent jump over last year, while used vehicle prices increased 5 percent, to $16,335, data from auto-pricing site TrueCar show.

It was also the year when the industry could finally put some real distance between it and the Great Recession. The auto bailouts, launched in 2008 as part of the $700 billion financial rescue, ended officially this month, when the Treasury Department sold its stake in lender Ally Financial, the last big recipient of federal relief.

It was great news for carmakers. Nearly 17 million cars and trucks were made across North America this year, an eight-year high. Five years after filing for bankruptcy, GM is soaring: Its profits doubled in the most recent quarter, compared to a year ago. Other once-sluggish brands also became resilient: Jeep's nationwide sales of Wranglers, Grand Cherokees and other cars have risen about 44 percent this year over last.

It was also one of the auto world's most inventive years yet, both in high-tech roll-outs of new concept cars and in upgrades for old best-sellers. America's top-selling vehicle for more than three decades, the Ford F-150, saw its frame radically reconfigured from steel to aluminum, shaving off 700 pounds and helping improve gas mileage. The smartphone world's top players also jumped into in-car computing, announcing dashboard tech like Apple CarPlay and Android Auto.

Electric-car giant Tesla made the most noise, with billionaire executive Elon Musk announcing a $5 billion Nevada battery "Gigafactory" and, in his latest pledge, a Tesla Roadster that drives 400 miles, the distance from Los Angeles to San Francisco, on a single charge. The hype pushed Musk's cars further into the spotlight and boosted Tesla's stock: Shares jumped 48 percent this year, closing Monday at about $225.

Not all of the auto world's innovation in 2014 focused on putting buyers behind the wheel. With young Americans driving far less than they used to, companies like techie taxi firm Uber saw their earnings and confidence soar. In one valuation, Uber was said to be worth more than Mazda and Tesla combined.

Some companies focused heavily on making human drivers become a thing of the past. Google this year unveiled its self-driving, bubble-bodied concept car, piloted exclusively by a computer — with no steering wheel or pedals in sight. In coming years, other automakers, including Cadillac, said they plan to market autonomous cars of their own.

But all of the good news this year was tainted by one crippling superlative: 2014 was the worst year for auto recalls in U.S. history. Automakers this year announced that more than 50 million cars and trucks — or about 1 in 5 on American roads – were at risk of critical defects.

Two of the most lethal, high-profile flaws — GM's faulty ignition switches and exploding air bags linked to Japanese auto-parts giant Takata – were linked to dozens of deaths, and millions of faulty cars remain on the road amid ongoing recalls.

GM has recalled 30 million cars and trucks worldwide. A series of investigations led to a $35 million fine for GM, and the deadline to join a victims' compensation fund overseen by adviser Kenneth Feinberg ends next month.

Other recalls were just as devastating. Federal prosecutors in March announced a $1.2 billion fine against Toyota due to its troubled recall of 10 million cars, marking the largest criminal penalty for an automaker in the U.S.

Even with nationwide recalls scheduled to take years to complete, analysts predict next year could prove to be even more lucrative for automakers. TrueCar predicts Americans will buy 17 million new cars and trucks next year, just a step below the industry's best year ever, in 2000, when 17.4 million vehicles were sold.

But now, half a decade after the industry bottomed, some analysts expect the rapid climb of sales could lose some speed, leading automakers to become even more competitive in 2015.

"With sales growth slowing, it could start to get a little more brutal and aggressive out there, in a trench warfare kind of way," said Kelley Blue Book senior analyst Karl Brauer. "The big question is how that's gonna play out in 2015 when there's so much less organic growth to go around."

Drew Harwell is a national business reporter at The Washington Post.

Source : http://www.washingtonpost.com/news/business/wp/2014/12/29/the-best-of-times-and-worst-of-times-for-americas-auto-industry/

Auto trade group hires Kansas governor's chief of staff - The Detroit News

Washington — The Alliance of Automobile Manufacturers said Monday it has hired a top aide to Kansas Gov. Sam Brownback as its new vice president of state affairs.

The auto trade association that represents Detroit's Big Three automakers, along with Toyota Motor Corp., Volkswagen AG and other firms, said Monday it hired Landon Fulmer, who is currently Brownback's chief of staff and has been a longtime aide to Brownback in Congress and in Kansas. He will start Jan. 5.

"Landon comes from a state where ideas are fervently debated and rough-and-tumble politics is a way of telling your constituents that you care. He is steady, smart, a great listener and a natural leader — all qualities that will make him a terrific ambassador for our industry," said Mitch Bainwol, president and CEO, Auto Alliance.

The alliance said Fulmer has experience with automotive issues, dating back to his time as legislative director for Brownback, when Fulmer worked on auto sales issues. Fulmer was an intern in Brownback's Senate office in 2002 and then worked in the office from 2003-2010, then moved to Kansas to serve as policy director after Brownback was elected as governor in 2010. Since April 2012, Fulmer has served as the governor's chief of staff.

Fulmer said state legislatures are key to automakers. Many states have taken up the issue of whether Tesla Motors can sell cars without a traditional dealer network, while other big issues include state zero-emission vehicle mandates, fuel and other vehicle taxes, "right to repair" rules and high-occupancy vehicle regulations.

"State legislatures are vibrant forums where policy can move with astonishing speed even as legislators wrestle over the details," said Fulmer. "In a state legislature, a bill can be introduced, heard in committee and on the floor the next week. You have to keep your running shoes on to keep up, and it is advisable to love it. I do."

Fulmer said he is a "car guy."

"I have been a car guy since boyhood, when I would oftentimes require that people address me as Mario Andretti rather than my real name," said Fulmer. "While I started out loving race cars, I have grown an appreciation for the full range of vehicles sold in our country. My home state, Kansas, is an agricultural state and almost two-thirds of new vehicle sales are light trucks, including SUVs, vans and pickups."

In May, Brownback called reports that the FBI was investigating the fundraising efforts of Fulmer and former chief of staff David Kensinger a "smear" campaign. "I'm not seeing the allegations of criminal activity. I'm seeing a lot of efforts to try to smear people," Brownback told The Wichita Eagle at the time.

The Eagle reported federal investigators were reviewing meetings that Kensinger held with lobbyists at state Republican Party headquarters in August 2012, including some attended by Fulmer.

The New York Times reported that Fulmer asked a lobbyist after the meeting for $1,000 each for 14 Republican state senate candidates.

Kensinger denied wrongdoing. Eileen Hawley, the governor's spokeswoman, told The Eagle that Fulmer did nothing wrong.

"Raising funds for candidates is a completely acceptable and common occurrence, in both parties. It is perfectly legal for a member of the governor's personal staff to participate in fundraising and that activity is in full compliance with state ethics statutes and regulations," she told the newspaper. "For people to infer anything else is quite simply wrong."

DShepardson@detroitnews.com

Read or Share this story: http://detne.ws/1AZHevA

Source : http://www.detroitnews.com/story/business/autos/2014/12/29/auto-trade-group-hires-kansas-governors-chief-staff/21001981/

NYT on auto title pawns - Washington Post

As I have illustrated previously, The New York Times has come completely off the rails when it comes to "news" coverage of consumer credit issues. Indeed, it appears that the paper is not even making an effort to distinguish news reporting from editorializing, as its Christmas Day article, "Rise in Loans Linked to Cars Is Hurting Poor" indicates. (The title in the url is equally suggestive — "Dipping into auto equity devastates many borrowers.")

This particular article focuses on the use of auto title pawns and is lumped in with the Times's ongoing "news" coverage of the growth in subprime auto lending (which again, as the chart in this article itself shows, still remains well below the percentage of loans in the pre-crisis period). What purchase-money subprime auto loans has to do with auto title pawns is never explained, but they are entirely different markets with entirely different lenders and entirely different consumer protection issues.

Now, to be sure, auto title pawns have high APRs and raise distinct consumer protection issues from other types of fringe lending products. So one should certainly pay attention to these products and the consumer protection issues that they raise. But if one really wants to understand whether this is a useful product for those who use it, it is important to understand who uses auto title pawns, why they use them, and what would happen to them if the product were not available.

The Times story instead provides a couple of anecdotes — and to be sure, they are sad stories and reflect the unfortunate underside associated with this product. But based on academic research, we also know that the couple of sad stories that the Times reports here are completely unrepresentative of who uses auto title pawns and why — and, more important, what would happen to consumers if the product was regulated away.

At the outset though, I should note that it appears that the reporters never even considered many of the relevant questions that they would need to ask to understand whether their blanket condemnation — "Rise in Loans Linked to Cars Is Hurting Poor" — is actually true.

Start with the first story of lab technician Caroline O'Connor, "who needed about $1,000 to cover her rent and electricity bills, believed she had found a financial lifeline." While the cash apparently helped her avoid eviction and having her electricity cut off (this is inferred, since the article doesn't report it), she ended up defaulting on the loan and having the vehicle repossessed, which is obviously sad. But is O'Connor's story representative of the market for auto title pawn loans?

A few years ago I wrote the first major article on auto title pawns (summary version here) based primarily on interviews with industry participants. Since that time, law professor Jim Hawkins has written two superb articles based on in-depth interviews with auto title pawn customers (here and here, the latter co-authored with Kathryn Fritzdixon and Paige Skiba and sporting one of the best law review article titles ever). (For simplicity of reading, I will refer to both of those articles interchangeably as "Hawkins.") And here's what the data generally show based on that research (we also discuss auto title pawns a bit in chapter 8 of "Consumer Credit and the American Economy"):

1. Auto title pawn customers are different from payday loan customers: It is often assumed that all of those who use various fringe lending products are more or less the same. This is not true. Most notably, auto title pawn customers are distinct from payday loan customers. Auto title pawn users typically fall into three categories:

(1) Independent small business, such as landscapers, handymen, etc.: These businesses essentially use their pickup truck or van as a source of liquid working capital to, say, buy several hundred dollars of sod and bushes on Monday for supplies and labor a yard job which they then pay back on Wednesday or Thursday. Business is unpredictable so traditional small business loans aren't useful for these businesses. Moreover, these liquidity needs often exceed the amounts allowed for payday loans under state laws (where permitted at all).

(2) Unbanked: Auto title pawns (as with traditional pawn shops) are heavily used by unbanked consumers. Payday loans require a bank account against which a check can be drawn, so while there is some substitution between payday loans and pawns (both auto and traditional), those who use title pawns often are unable to access payday loans (in addition, those who use payday loans often see overdraft protection as a closer substitute than title pawns). Title pawns do not require a bank account and can generate cash quickly. Auto title pawns also have two substantial advantages over traditional pawns: first, cars are worth more than traditional pawned goods (the average pawnbroker loan is estimated to be about $70); second, one huge benefit of auto title pawns is that the consumer retains use of the collateral during the loan, rather than having to surrender it. As gold prices soared in recent years, traditional pawns became capable of generating more cash, as jewelry is one of! the most common type of goods pawned (especially by women). But as gold prices have fallen, the value of pawned jewelry has fallen as well.

(3) Larger loans: The final category of people are those with impaired for whom payday loans simply do not generate enough cash. According to the NYT story, Ms. O'Connor needed $1,000 for bills. Under Missouri law, payday loans are limited to $500, so even if she preferred to use a payday loan it appears that it would not have generated sufficient funds. Those who use fringe lending products almost never have access to credit cards, either because they don't have them or they are maxxed out already.

2. Those who use auto title pawns have limited options: Those who use auto title pawns, as with other fringe lending products, typically have limited credit options. As we discuss extensively in "Consumer Credit and the American Economy," those who use these products typically have a high demand for credit but highly-restricted supply. They tend to be younger, lower-income, and in the early stages of their household lifecycle, during which credit demand is high. As just mentioned, these consumers typically don't have bank accounts and lack access to credit cards and higher-quality credit.

Most notably, according to Hawkins's research, 8.5 percent of those who use auto title pawns report that if they could not pawn their car they would have had to instead sell the car outright in order to generate needed cash for bills. I'm not a mathematician, but by my estimate if you have to sell your car then that increases your likelihood of losing access to your car to 100 percent. Hawkins also found that this figure — 8.5 percent — exceeded the number of people who actually lose their car to repossession as a result of taking on auto title pawn. So by depriving consumers of the possibility of borrowing against their car equity and potentially keeping the car, prohibiting car title loans will instead require many consumers to sell their cars in order to access their equity, while losing the use value in the meantime. It is hard to see how consumers are made better off by being forced to sell their cars in order to access the equity rather than giving them the ! option of borrowing against it instead. (This would seem to be an obvious point, but it seems to have never occurred to the reporters at The New York Times that one alternative to pawning a car would be to have to sell it instead.)

3. Consumers use auto title pawns for pressing expenses: Non-business users of auto title pawns (and other fringe lending products) use them for pressing expenses and emergencies. They have limited savings and use these loans for needs such as rent or mortgage, utility bills, unexpected expenses, or medical bills. Indeed, a common use of auto title pawns is to finance needed repairs to the car itself to keep it operational. You cannot wish away the need for credit, and restricting a source of supply (auto title pawns) does not eliminate consumer need for credit. According to Hawkins, 18 percent of title pawn customers said that they would have had to pay a late fee on their bills if they couldn't get a title loan.

4. Title pawns provide limited risk of financial breakdown: As Hawkins has noted, one striking feature of most fringe lending products is that they present limited risk of financial breakdown to consumers. To be sure, the risk of an auto title pawn is not trivial — the loss of a car and the potential consequences associated with that. But as a financial matter, risk is limited. The risk of an auto title pawn loan, for example, is limited to loss of the car. Unlike, say, credit cards or credit card cash advances, which can generate finance charges and fees that can cause the balance to increase and potentially dig a hole for consumers, auto title pawns are non-recourse and so the consumer's exposure is limited. Payday loans are similar — the borrower's risk is limited to the consequences of not paying the original amount borrowed (there may be ancillary costs, such as bank overdraft fees, but note that the payday lenders have no incentive to make r! epeated draws because they don't benefit). Also, unlike payday loans (in some states) or credit cards, the borrower can only have one auto title loan outstanding at a time.

5. The risk and consequences of repossession are not as extreme as might be supposed: The risk of auto title pawns is obvious — the consumer might lose his or her car. This can be especially consequential if it is necessary for the consumer's work, and there could be follow-on negative effects. Fortunately, these consequences — while certainly concerning and tragic — are much less common that the Times's article suggests. And it turns out that those who use these products are not as stupid as the Times's reporters imply they are. Consider:

(1) To repeat the point: For many of those who use auto title pawns, the alternative is to sell the car, which results in a 100% likelihood of losing possession.

(2) Most vehicles subject to auto title pawns are not the consumer's only means of transportation: According to surveys, roughly 70-80% of those who use auto title pawns have more than one car. Moreover, the cars that are pawned are typically older and less valuable vehicles, so they are pawning a secondary car. Perhaps most surprising, almost 5% of title pawn customers said that if they lost their cars to repossession they'd simply buy another car. (This is presumably because they could finance the car, so even if they don't have enough cash on hand to redeem their old car, they could presumably make monthly payments on a replacement). Only 15% of title pawn customers said that the car that they were pawning was their only way to get to work. As Fritzdixon, Hawkins, and Skiba note, "Less than 15% of borrowers stated that they would have no other way to get to work. While not insignificant, this small percentage suggests that the dire consequences that critics ! predict are unlikely to occur for the vast majority of title borrowers. Rough calculations would place the percentage of title borrowers who lose their jobs as a result of title lending at 1.5%."

(3) Most estimates find that approximately 4-6% of vehicles that are pawned are eventually repossessed–less than the 8.5% of those who said that they would have to sell their cars to get cash if title loans were not available. Some of those who have their cars repossessed subsequently redeem the cars. As Hawkins summarizes, "repossession rates…are much lower than previous research has indicated."

(4) Many defaults on auto title loans are because the car is totaled or breaks down. In fact, it appears that only about half of defaults on title pawns actually result in repossession. This is because, as noted, these are typically older cars to begin with and they have a substantial risk of major mechanical failure for which repairs exceed the cost of vehicle. Title pawn lenders are not named as insureds on the vehicles. Like traditional pawn loans, the structure of title pawns essentially creates an option for the consumer to either pay or walk away, and where the car becomes worthless the consumer can walk away.

(5) Contrary to the assertion that lenders have leverage and can pressure consumers to redeem their cars at any cost, Hawkins found that very few title pawn customers said that they would prioritize those payments over payments such as rent, utilities, medical payments, and groceries (a majority said that they would prioritize their title pawn payments over credit card bills). This is because lenders have much less leverage than supposed–as noted, most consumers have more than one car or access to other transportation, the loans are non-recourse, and in many cases the cars are old and inoperable.

6. Consumers generally understand the costs and risks: Surveys of consumers who use fringe lending products consistently find that although these products are expensive, consumers who use them generally understand that they are costly. They may not be able to state the APR, but they do know the finance charges and other terms. In fact, one common reason given by many consumers for why they use products like payday loans and auto title pawns is that the products are simply and easy to understand. Many of them have had bad experiences with more complex products such as bank accounts and credit cards and so opt for these simpler products. Restricting access to them, therefore, appears to be grounded solely in paternalism, not in a lack of proper disclosure and the like.

At root, the fundamental problem with The New York Times's article is that people are not as stupid as the Times reporters think that they are. Consumers use auto title pawns for a variety of complex reasons and those who use these loans typically do so because they are better than the alternatives — eviction, utility cutoffs, or the like. Many of those who use them look like consumers but are actually small businesses. And only a small minority are consumers who are risking their only transportation or only way to work by taking a loan — most have another vehicle in the household and almost as many say they would simply buy a new car, if their car was repossessed. Based on the best available estimates, the percentage of those who say that they would be forced to sell their car to get needed cash if title loans weren't available actually exceeds the number of those who are estimated to lose their cars to repossession.

Finally, for unbanked consumers — whose ranks have swelled as a result of the Durbin Amendment and new regulations on overdraft protection — auto title pawns are one of the few remaining sources of liquidity available to meet urgent expenses.

Auto title pawns certainly raise unique and important consumer protection questions but it is unwise to simply dismiss them as "hurting the poor" without doing even the slightest bit of research to actually understand how the product is used.

Source : http://www.washingtonpost.com/news/volokh-conspiracy/wp/2014/12/29/nyt-on-auto-title-pawns/

Solid auto sales, no tax reform among safe bets in 2015 - azcentral.com

[unable to retrieve full-text content]

azcentral.com The year could shape up as another good one for auto sales. With the job market improving, consumer sentiment back to pre-recession levels, interest rates still low and a gradually aging fleet of cars and trucks, the auto rebound should keep rolling along.

Source : http://www.azcentral.com/story/money/business/2014/12/27/soli! d-auto-sales-tax-reform-among-safe-bets/20956271/

Mass. AG probes Santander for auto lending practices - Boston Globe

EPA

Martha Coakley's office is looking at whether Santander lent to borrowers unlikely to repay the money and sold those loans to Wall Street, where they were packaged into securities and resold to investors.

Massachusetts Attorney General Martha Coakley is investigating the financial services company Santander's subprime auto lending business over concerns that it may be engaged in the type of predatory practices that, on a larger scale, led to the mortgage and financial crises of several years ago.

Coakley's office is looking at whether Santander lent to borrowers who were unlikely to repay the money and sold those loans to Wall Street, where they were packaged into securities and resold to investors.

Coakley has subpoenaed Santander's US auto finance company to produce documents related to borrowers' credit histories, the interest rates they were charged, and how the loan risks were described to investors, said Brad Puffer, spokesman for the attorney general. Coakley took a similar approach in investigations of subprime mortgage lending a few years ago.

"We are using our experience, gained in holding banks responsible for unfair and predatory mortgage loans, to ensure consumers are protected in other areas of lending," Puffer said.

He said the attorney general is questioning a handful of other auto lenders, whom he declined to name, and attorneys general across the country have launched similar investigations into auto loan practices.

Santander issued a statement saying that it is cooperating with investigators and that its policy is "to comply with all lending and loan servicing laws, as well as the rules and guidance of our supervisors and regulators."

The lending pattern at issue is one that many mortgage lenders followed in the run-up to the last housing bust, which ultimately resulted in widespread loan defaults, worthless securities, and the near collapse of the banking system. However, it is unlikely that problems in the subprime auto lending market would spiral into another financial crisis, largely because auto loans are only a fraction of mortgage debt and it's far easier to repossess a car to recover money than to foreclose on a home.

But regulators worry that losses from these loans ultimately will cost consumers in the form of higher interest rates and make it harder for credit-worthy customers to obtain auto financing, much as many people were locked out of mortgages following the financial crisis.

Santander, a Spanish bank with US headquarters in Boston, declined to comment specifically on the Massachusetts investigation. But its American subsidiary, Santander Holdings USA Inc., acknowledged in regulatory filings this fall that it also was subpoenaed by the US Department of Justice and multiple state attorneys general over its auto loan business, which accounts for nearly one-third of its US assets.

Earlier this month, the New York Department of Financial Services, that state's top bank regulator, said it issued subpoenas to Santander and six other auto lenders over discriminatory practices after it found a significant difference between interest rates offered to minority and other borrowers.

Bill Himpler, executive vice president at American Financial Services Association, a trade group that represents auto lenders, said some regulatory concerns relate to dealerships, not lenders. For example, he said, financial firms don't know the race of the car buyers.

Auto lending is a robust business and performed well in recent years even as consumers curtailed credit card, mortgage, and other debt. Auto loan debt among US households reached an all-time high this year, $934 billion, up 15 percent from 2007, when the recession began (mortgage debt was $8.13 trillion in the third quarter).

Lenders have made it easier for borrowers — even those with troubled credit histories — to drive cars home from dealerships, in part to meet the demand of investors. Subprime loans, which carry higher interest rates, are riskier but offer the potential of higher returns to investors.

"We've seen a lot of money chasing auto lending," said John Van Alst, an attorney with the National Consumer Law Center, a Boston advocacy group.

That has opened the door to potential abuses, as investor demand pushes institutions to make more loans, dealerships to sell more cars, and consumers to take on more debt. Auto delinquency rates jumped by 13 percent in the third quarter of 2014 from a year earlier, driven primarily by subprime lending, according to TransUnion, a credit information firm.

Santander became a dominant player in the subprime market in 2006, when it paid $636 million to buy Drive Financial Services, a Dallas lender specializing in subprime loans. Drive was renamed Santander Consumer USA, and its business has grown as it bought other auto lenders and built relationships with nearly 14,000 dealerships nationwide.

Santander officials say the company is trying to expand beyond the subprime market to borrowers with better credit histories and signed a deal last year to become the preferred lender for Chrysler's dealers. Still, 86 percent of Santander's car loans remain below prime, or for borrowers with credit scores below 620 points, according to its financial reports.

The company repossessed more than 166,000 vehicles through September of this year. In 2013, US lenders repossessed 1.4 million cars.

Santander Consumer is the target of the most complaints for auto lenders in the US Consumer Financial Protection Bureau's database.

Last month, Santander settled a lawsuit brought by two consumers who alleged that the bank failed to properly monitor a Queens dealership, called New York Motor Group LLC, where an employee who handled borrower financing was accused of falsifying loan documents.

Peter Lane, a Northampton attorney, who represented consumers in this claim, declined to comment. Santander also declined to comment on the case.

In a presentation to investors last month, Santander Consumer emphasized that it has strengthened oversight, including increasing staff that ensures the company and the loans that it approves comply with state and federal rules.

Van Alst, with the Consumer Law Center, praised regulators for paying more attention to auto loans, because for most consumers cars are crucial assets that help them get and keep jobs.

If they have to stretch to pay off a large car loan and let other bills slide, they will, Van Alst said, leading to other financial problems.

"It is hurting the individual consumers," he said. "They're not paying other bills to stay current on the car."

Deirdre Fernandes can be reached at deirdre.fernandes @globe.com.

Source : http://www.bostonglobe.com/business/2014/12/25/investigates-santander-for-auto-lending-practices/RK51H7I83Bd2UxrrCFeSLM/story.html

Solid auto sales, no tax reform among safe bets in 2015 - azcentral.com

[unable to retrieve full-text content]

azcentral.com The year could shape up as another good one for auto sales. With the job market improving, consumer sentiment back to pre-recession levels, interest rates still low and a gradually aging fleet of cars and trucks, the auto rebound should keep rolling along.

Source : http://www.azcentral.com/story/money/business/2014/12/27/soli! d-auto-sales-tax-reform-among-safe-bets/20956271/

Mass. AG probes Santander for auto lending practices - Boston Globe

EPA

Martha Coakley's office is looking at whether Santander lent to borrowers unlikely to repay the money and sold those loans to Wall Street, where they were packaged into securities and resold to investors.

Massachusetts Attorney General Martha Coakley is investigating the financial services company Santander's subprime auto lending business over concerns that it may be engaged in the type of predatory practices that, on a larger scale, led to the mortgage and financial crises of several years ago.

Coakley's office is looking at whether Santander lent to borrowers who were unlikely to repay the money and sold those loans to Wall Street, where they were packaged into securities and resold to investors.

Coakley has subpoenaed Santander's US auto finance company to produce documents related to borrowers' credit histories, the interest rates they were charged, and how the loan risks were described to investors, said Brad Puffer, spokesman for the attorney general. Coakley took a similar approach in investigations of subprime mortgage lending a few years ago.

"We are using our experience, gained in holding banks responsible for unfair and predatory mortgage loans, to ensure consumers are protected in other areas of lending," Puffer said.

He said the attorney general is questioning a handful of other auto lenders, whom he declined to name, and attorneys general across the country have launched similar investigations into auto loan practices.

Santander issued a statement saying that it is cooperating with investigators and that its policy is "to comply with all lending and loan servicing laws, as well as the rules and guidance of our supervisors and regulators."

The lending pattern at issue is one that many mortgage lenders followed in the run-up to the last housing bust, which ultimately resulted in widespread loan defaults, worthless securities, and the near collapse of the banking system. However, it is unlikely that problems in the subprime auto lending market would spiral into another financial crisis, largely because auto loans are only a fraction of mortgage debt and it's far easier to repossess a car to recover money than to foreclose on a home.

But regulators worry that losses from these loans ultimately will cost consumers in the form of higher interest rates and make it harder for credit-worthy customers to obtain auto financing, much as many people were locked out of mortgages following the financial crisis.

Santander, a Spanish bank with US headquarters in Boston, declined to comment specifically on the Massachusetts investigation. But its American subsidiary, Santander Holdings USA Inc., acknowledged in regulatory filings this fall that it also was subpoenaed by the US Department of Justice and multiple state attorneys general over its auto loan business, which accounts for nearly one-third of its US assets.

Earlier this month, the New York Department of Financial Services, that state's top bank regulator, said it issued subpoenas to Santander and six other auto lenders over discriminatory practices after it found a significant difference between interest rates offered to minority and other borrowers.

Bill Himpler, executive vice president at American Financial Services Association, a trade group that represents auto lenders, said some regulatory concerns relate to dealerships, not lenders. For example, he said, financial firms don't know the race of the car buyers.

Auto lending is a robust business and performed well in recent years even as consumers curtailed credit card, mortgage, and other debt. Auto loan debt among US households reached an all-time high this year, $934 billion, up 15 percent from 2007, when the recession began (mortgage debt was $8.13 trillion in the third quarter).

Lenders have made it easier for borrowers — even those with troubled credit histories — to drive cars home from dealerships, in part to meet the demand of investors. Subprime loans, which carry higher interest rates, are riskier but offer the potential of higher returns to investors.

"We've seen a lot of money chasing auto lending," said John Van Alst, an attorney with the National Consumer Law Center, a Boston advocacy group.

That has opened the door to potential abuses, as investor demand pushes institutions to make more loans, dealerships to sell more cars, and consumers to take on more debt. Auto delinquency rates jumped by 13 percent in the third quarter of 2014 from a year earlier, driven primarily by subprime lending, according to TransUnion, a credit information firm.

Santander became a dominant player in the subprime market in 2006, when it paid $636 million to buy Drive Financial Services, a Dallas lender specializing in subprime loans. Drive was renamed Santander Consumer USA, and its business has grown as it bought other auto lenders and built relationships with nearly 14,000 dealerships nationwide.

Santander officials say the company is trying to expand beyond the subprime market to borrowers with better credit histories and signed a deal last year to become the preferred lender for Chrysler's dealers. Still, 86 percent of Santander's car loans remain below prime, or for borrowers with credit scores below 620 points, according to its financial reports.

The company repossessed more than 166,000 vehicles through September of this year. In 2013, US lenders repossessed 1.4 million cars.

Santander Consumer is the target of the most complaints for auto lenders in the US Consumer Financial Protection Bureau's database.

Last month, Santander settled a lawsuit brought by two consumers who alleged that the bank failed to properly monitor a Queens dealership, called New York Motor Group LLC, where an employee who handled borrower financing was accused of falsifying loan documents.

Peter Lane, a Northampton attorney, who represented consumers in this claim, declined to comment. Santander also declined to comment on the case.

In a presentation to investors last month, Santander Consumer emphasized that it has strengthened oversight, including increasing staff that ensures the company and the loans that it approves comply with state and federal rules.

Van Alst, with the Consumer Law Center, praised regulators for paying more attention to auto loans, because for most consumers cars are crucial assets that help them get and keep jobs.

If they have to stretch to pay off a large car loan and let other bills slide, they will, Van Alst said, leading to other financial problems.

"It is hurting the individual consumers," he said. "They're not paying other bills to stay current on the car."

Deirdre Fernandes can be reached at deirdre.fernandes @globe.com.

Source : http://www.bostonglobe.com/business/2014/12/25/investigates-santander-for-auto-lending-practices/RK51H7I83Bd2UxrrCFeSLM/story.html

AG investigates Santander for auto lending practices - Boston Globe

EPA

Martha Coakley's office is looking at whether Santander lent to borrowers unlikely to repay the money and sold those loans to Wall Street, where they were packaged into securities and resold to investors.

Massachusetts Attorney General Martha Coakley is investigating Santander bank's subprime auto lending business over concerns that the company may be engaged in the type of predatory practices that, on a larger scale, led to the mortgage and financial crises of several years ago.

Coakley's office is looking at whether Santander lent to borrowers who were unlikely to repay the money and sold those loans to Wall Street, where they were packaged into securities and resold to investors.

Coakley has subpoenaedSantander's US auto finance company to produce documents related to borrowers' credit histories, the interest rates they were charged, and how the loan risks were described to investors, said Brad Puffer, spokesman for the attorney general. Coakley took a similar approach in investigations of subprime mortgage lending a few years ago.

"We are using our experience, gained in holding banks responsible for unfair and predatory mortgage loans, to ensure consumers are protected in other areas of lending," Puffer said.

He said the attorney general is questioning a handful of other auto lenders, whom he declined to name, and attorneys general across the country have launched similar investigations into auto loan practices.

Santander issued a statement saying that it is cooperating with investigators and that its policy is "to comply with all lending and loan servicing laws, as well as the rules and guidance of our supervisors and regulators."

The lending pattern at issue is one that many mortgage lenders followed in the run-up to the last housing bust, which ultimately resulted in widespread loan defaults, worthless securities, and the near collapse of the banking system. However, it is unlikely that problems in the subprime auto lending market would spiral into another financial crisis, largely because auto loans are only a fraction of mortgage debt and it's far easier to repossess a car to recover money than to foreclose on a home.

But regulators worry that losses from these loans ultimately will cost consumers in the form of higher interest rates and make it harder for credit-worthy customers to obtain auto financing, much as many people were locked out of mortgages following the financial crisis.

Santander, a Spanish bank with US headquarters in Boston, declined to comment specifically on the Massachusetts investigation. But its American subsidiary, Santander Holdings USA Inc., acknowledged in regulatory filings this fall that it also was subpoenaed by the US Department of Justice and multiple state attorneys general over its auto loan business, which accounts for nearly one-third of its US assets.

Earlier this month, the New York Department of Financial Services, that state's top bank regulator, said it issued subpoenas to Santander and six other auto lenders over discriminatory practices after it found a significant difference between interest rates offered to minority and other borrowers.

Bill Himpler, executive vice president at American Financial Services Association, a trade group that represents auto lenders, said some regulatory concerns relate to dealerships, not lenders. For example, he said, financial firms don't know the race of the car buyers.

Auto lending is a robust business and performed well in recent years even as consumers curtailed credit card, mortgage, and other debt. Auto loan debt among US households reached an all-time high this year, $934 billion, up 15 percent from 2007, when the recession began (mortgage debt was $8.13 trillion in the third quarter).

Lenders have made it easier for borrowers — even those with troubled credit histories — to drive cars home from dealerships, in part to meet the demand of investors. Subprime loans, which carry higher interest rates, are riskier but offer the potential of higher returns to investors.

"We've seen a lot of money chasing auto lending," said John Van Alst, an attorney with the National Consumer Law Center, a Boston advocacy group.

That has opened the door to potential abuses, as investor demand pushes institutions to make more loans, dealerships to sell more cars, and consumers to take on more debt. Auto delinquency rates jumped by 13 percent in the third quarter of 2014 from a year earlier, driven primarily by subprime lending, according to TransUnion, a credit information firm.

Santander became a dominant player in the subprime market in 2006, when it paid $636 million to buy Drive Financial Services, a Dallas lender specializing in subprime loans. Drive was renamed Santander Consumer USA, and its business has grown as it bought other auto lenders and built relationships with nearly 14,000 dealerships nationwide.

Santander officials say the company is trying to expand beyond the subprime market to borrowers with better credit histories and signed a deal last year to become the preferred lender for Chrysler's dealers. Still, 86 percent of Santander's car loans remain below prime, or for borrowers with credit scores below 620 points, according to its financial reports.

The company repossessed more than 166,000 vehicles through September of this year. In 2013, US lenders repossessed 1.4 million cars.

Santander Consumer is the target of the most complaints for auto lenders in the US Consumer Financial Protection Bureau's database.

Last month, Santander settled a lawsuit brought by two consumers who alleged that the bank failed to properly monitor a Queens dealership, called New York Motor Group LLC, where an employee who handled borrower financing was accused of falsifying loan documents.

Peter Lane, a Northampton attorney, who represented consumers in this claim, declined to comment. Santander also declined to comment on the case.

In a presentation to investors last month, Santander Consumer emphasized that it has strengthened oversight, including increasing staff that ensures the company and the loans that it approves comply with state and federal rules.

Van Alst, with the Consumer Law Center, praised regulators for paying more attention to auto loans, because for most consumers cars are crucial assets that help them get and keep jobs.

If they have to stretch to pay off a large car loan and let other bills slide, they will, Van Alst said, leading to other financial problems.

"It is hurting the individual consumers," he said. "They're not paying other bills to stay current on the car."

RELATED:

• Santander promises to spend $24 million to provide home loans in Providence

• 07/2013: Sovereign will become Santander in October

• 10/2013: Santander aims for US acceptance with a new media campaign

Deirdre Fernandes can be reached at deirdre.fernandes @globe.com.

Source : https://www.bostonglobe.com/business/2014/12/25/investigates-santander-for-auto-lending-practices/RK51H7I83Bd2UxrrCFeSLM/story.html

Rise in Loans Linked to Cars Is Hurting Poor - New York Times

Photo

Johanna Pimentel said she and both of her brothers had taken out multiple title loans. Credit Dilip Vishwanat for The New York Times

Related Links

The rusting 1994 Oldsmobile sitting in a driveway just outside St. Louis was an unlikely cash machine.

That was until the car's owner, a 30-year-old hospital lab technician, saw a television commercial describing how to get cash from just such a car, in the form of a short-term loan.

The lab technician, Caroline O'Connor, who needed about $1,000 to cover her rent and electricity bills, believed she had found a financial lifeline.

"It was a relief," she said. "I did not have to beg everyone for the money."

Her loan carried an annual interest rate of 171 percent. More than two years and $992.78 in debt later, her car was repossessed.

"These companies put people in a hole that they can't get out of," Ms. O'Connor said.

The automobile is at the center of the biggest boom in subprime lending since the mortgage crisis. The market for loans to buy used cars is growing rapidly.

And similar to how a red-hot mortgage market once coaxed millions of borrowers into recklessly tapping the equity in their homes, the new boom is also leading people to take out risky lines of credit known as title loans.

Photo

Credit

They are, roughly speaking, the home equity loans of subprime auto. In these loans, which can last as long as two years or as little as a month, borrowers turn over the title of their cars in exchange for cash — typically a percentage of the cars' estimated resale values.

"Turn your car title into holiday cash," TitleMax, a large title lender, declared in a recent television commercial, showing a Christmas stocking overflowing with money.

More than 1.1 million households in the United States used auto title loans in 2013, according to a survey by the Federal Deposit Insurance Corporation — the first time the agency has included the loans in its annual survey.

Title loans are an increasingly prevalent form of high-cost, short-term credit in subprime finance, as regulators in a number of states crack down on payday loans.

For many borrowers, title loans, also sometimes known as motor-vehicle equity lines of credit or title pawns, are having ruinous financial consequences, causing owners to lose their vehicles and plunging them further into debt.

Driven Into Debt

Articles in this series are examining the boom in subprime auto loans.

A review by The New York Times of more than three dozen loan agreements found that after factoring in various fees, the effective interest rates ranged from nearly 80 percent to over 500 percent. While some loans come with terms of 30 days, many borrowers, unable to pay the full loan and interest payments, say that they are forced to renew the loans at the end of each month, incurring a new round of fees.

Customers of TitleMax, for example, typically renewed their loans eight times, a former president of the company disclosed in a 2009 deposition.

And because many lenders make the loan based on an assessment of a used car's resale value, not on a borrower's ability to repay that money, many people find that they are struggling to keep up almost as soon as they drive off with the cash.

As a result, roughly one in every six title-loan borrowers will have the car repossessed, according to an analysis of 561 title loans by the Center for Responsible Lending, a nonprofit in Durham, N.C.

The lenders argue that they are providing a source of credit for people who cannot obtain less-expensive loans from banks. The high interest rates, the lenders say, are necessary to offset the risk that borrowers will stop paying their bills.

Title loans are part of a broader lending boom tied to used cars. Auto loans allowing subprime borrowers — those with credit scores at 640 or below — to buy cars have surged in the last five years.

The high interest rates on the loans have enticed an influx of Wall Street money. Private equity firms are investing in lenders, and some big banks are ramping up their auto lending to people with blemished credit.

Propelling this lending spree are the cars themselves, and their centrality in people's lives.

In most parts of the country, a car is vital to participating in the work force, and lenders are betting that people will do virtually anything to keep their cars, choosing to make auto loan payments before paying for just about any other expense.

Video

No Credit? No Problem

Banks and private equity firms searching for high-yield investments have fueled a boom in subprime auto loans to buyers who can't afford them, including those who recently filed for bankruptcy.

Video by Axel Gerdau and John Woo on Publish Date July 19, 2014.

The title lending industry, perhaps more than any other facet of subprime auto lending, thrives because of the car's importance.

While people seeking title loans are often at their most desperate — dealing with a job loss, a divorce or a family illness — the lenders are willing to extend them loans because they know that most borrowers will pay their bill to keep their cars. Some lenders do not even bother to assess a borrower's credit history.

"The threat of repossession turns the borrower into an annuity for the lenders," said Diane Standaert, the director of state policy at the Center for Responsible Lending.

Unable to raise the thousands of dollars he needed to repair his car, Ken Chicosky, a 39-year-old Army veteran, felt desperate. He received a $4,000 loan from Cash America, a lender with a storefront in his Austin, Tex., neighborhood.

The loan, which came with an annual interest rate of 98.3 percent, helped him fix up the 2008 Audi that he relied on for work, but it has sunk his credit score. Mr. Chicosky, who is also attending college, uses some of his financial aid money to pay his title-loan bill.

Mr. Chicosky said he knew the loan was a bad decision when he received the first bill. It detailed how he would have to pay a total of $9,346 — a sum made up of principal, interest and other fees.

"When you are in a situation like that, you don't ask very many questions," he said.

Cash America declined to comment.

Rapid Expansion

Clutching handfuls of cash, a former Miss America contestant zips around in a red sports car, dancing and rapping about how TitleMax has "your real money."

Commercials like these help companies like TitleMax entice borrowers to take on the costly loans. TitleMax, a brand of TMX Finance, is privately held — like virtually all of the title loan companies — and does not disclose much financial information. But a regulatory filing for the first three months of 2013 offers a glimpse into the industry's tremendous growth.

During that period, the profits at TMX Finance rose by 47 percent from the same period two years earlier, and the number of stores it operated nearly doubled, to 1,108. The total volume of loans originated during the first three months of last year reached $169 million, up 67 percent from the same period in 2011.

TMX Finance, based in Savannah, Ga., wants to expand further, opening stores in states where regulations are "favorable," according to a 2013 regulatory filing. Only a few years after emerging from bankruptcy in 2009, the company is enjoying an influx of cash from mainstream investors. Big bond funds managed by Legg Mason and Putnam Investments have bought portions of TMX Finance's debt. The company also borrowed $17.5 million to buy a private jet.

The title lenders are seizing upon a broad retrenchment among banks, which have become wary of making loans to borrowers on the fringe of the financial system. Regulations passed after the financial crisis have made it much more expensive for banks to make loans to all but the safest borrowers.

The title lenders are also benefiting as state authorities restrict payday loans, effectively pushing payday lenders out of many states. While title loans share many of the same features — in some cases carrying rates that eclipse those on payday loans — they have so far escaped a similar crackdown.

In 21 states, car title lending is expressly permitted, with title lenders charging interest of up to 300 percent a year. In most other states, lenders can make loans with cars as collateral, but at lower interest rates.

Photo

The new boom in subprime lending is leading people to take out risky lines of credit known as title loans. Credit Dilip Vishwanat for The New York Times

Seeing the regulatory landscape shift, some of the country's largest payday lenders are switching gears. When Arizona effectively outlawed payday loans, ACE Cash Express registered its payday loan storefronts in the state as car title lenders, state records show.

Lenders made similar changes in Virginia, where lawmakers outlawed payday lending in 2010. But title lenders were untouched by that law and have expanded throughout the state, drawing business from Maryland.

The number of stores offering title loans in Virginia increased by 24 percent from 2012 to 2013, according to state records. Last year, the lenders made 177,775 loans, up roughly 612 percent from 2010, when the state banned payday lending.

In Tennessee, the number of title lending stores increased by about 22 percent from 2011 to 2013, reaching 1,017.

That is a small fraction of the industry's overall size, state regulators say, because only a handful of states keep statistics. Legal aid offices in Arizona, California, Georgia, Missouri, Texas and Virginia report that they have experienced an influx of clients who have run into trouble with the loans.

"The demand is there for people who are desperate for money," said Jay Speer, the executive director of the Virginia Poverty Law Center.

Loopholes and Adversity

When Tiffany Capone suggested that her fiancé, Michael, take out a $10,000 TitleMax loan with a 119 percent interest rate, she figured it would be a temporary fix to pay the bills. But this summer, after Michael fell behind on the loan payments, the couple's three-year-old Hyundai was repossessed.

"It had my child's car seat in the back," said Ms. Capone, of Olney, Md.

With their car gone, the couple had to sell most of their furniture and other belongings to a pawnshop so they could afford to pay for taxis to ferry Michael, a diabetic with a heart condition, to his frequent doctors' appointments.

The hardships caused by title loans are being cited as one of the big challenges facing poor and minority communities.

"It is a form of indenture," said Robert Swearingen, a lawyer with Legal Services of Eastern Missouri, adding that "because of the threat of repossession, they can string you along for the rest of your life."

Video

The Remote Repo Man

As auto lenders reach out to those with poor credit, they are increasingly using starter interruption devices, technology that allows them to remotely disable a car, to spur timely payment.

Video by Sean Patrick Farrell on Publish Date September 25, 2014. Photo by By Sean Patrick Farrell on September 24, 2014. Photo John Gurzinski for The New York Times.

Johanna Pimentel said she and both of her brothers had taken out multiple title loans.

"They are everywhere, like liquor stores," she said.

Ms. Pimentel, 32, had moved her family out of Ferguson, Mo., to a higher-priced suburb of St. Louis that promised better schools. But after a divorce, her former husband moved out, and she had trouble paying her rent.

Ms. Pimentel took out a $3,461 title loan using her 2002 Suburban as collateral.

After falling behind, she woke up one morning last March to find that the car had been repossessed. Without it, she could not continue to run her day care business.

Pointing to such experiences, lawmakers in some states — regulating the industry largely falls to states — have called for stricter limits on title loans or outright bans.

In Virginia, lawmakers passed a bill in 2010 that institutes some restrictions on the practice, including preventing lenders from trying to collect money from customers once a car has been repossessed. That same year, Montana voters overwhelmingly backed a ballot initiative that capped rates on title loans at 36 percent.

But for every state where there has been a crackdown, there are more where the industry has mobilized to beat back regulations.

In Wisconsin, it took the title loan industry only one year to reverse a ban on the loans that had been put in place in 2010. In New Hampshire in 2008, state legislators enacted a law that put a 36 percent ceiling on the rates that title lenders could charge. Four years later, though, lobbyists for the industry won a repeal of the law.

"This is nothing but government-authorized loan sharking," said Scott A. Surovell, a Virginia lawmaker who has proposed bills that would further rein in title lenders.

Photo

Scott A. Surovell, a Virginia lawmaker, in front of a title loan lender in Alexandria, Va. Mr. Surovell has proposed bills that would further rein in title lenders. Credit Jabin Botsford/The New York Times

Even when there are restrictions, some lenders find creative ways to continue business as usual. In California, where the interest rates and fees that lenders can charge on loans for $2,500 or less are restricted, some lenders extend loans for just over that amount.

Sometimes the workarounds are more blatant.

The City of Austin allows title lenders to extend loans only for three months. But that did not stop Mr. Chicosky, the veteran who borrowed $4,000 for car repairs, from getting a loan for 24 months.

Last year, after applying for a loan at a Cash America store in Austin, Mr. Chicosky said, a store employee told him that he would have to fill out the paperwork and pick up his check in a nearby town. Mr. Chicosky's lawyer, Amy Clark Kleinpeter, said the location switch appeared to be a way to get around the rules in Austin.

The lender offered a different explanation to Mr. Chicosky. "They told me that they didn't have a printer at the Austin location that was big enough to print my check," he said.

More Articles in This Series:

Miss a Payment? Good Luck Moving That Car

By MICHAEL CORKERY and JESSICA SILVER-GREENBERG

Subprime lenders are increasingly relying on technology that allows them to track and disable delinquent borrowers' vehicles with just a tap of a cellphone app.

Source : http://dealbook.nytimes.com/2014/12/25/dipping-into-auto-equity-devastates-many-borrowers/