NEW YORK — The New York City Department of Consumer Affairs (DCA) announced a new car loan initiative this month aimed at providing subprime car buyers with affordable loans from banks and credit unions. The initiative comes six months after the department proposed eliminating dealer markups in the state.
The initiative, announced March 23, stems from concerns that some dealerships are participating in predatory lending practices, “such as selling unwanted add-ons and arranging high-interest subprime loans without informing consumers of critical information,” according to a DCA press release. The department has issued a Request for Expression of Interest (RFEI) inviting banks and credit unions to submit auto loan proposals designed for low-income purchasers that offer a maximum APR below the state’s 16%, among other requirements.
“For many families, especially those with low incomes, a car is one of the biggest purchases that they will make and many borrowers who are sold predatory loans are already struggling financially,” said DCA Commissioner Julie Menin in a release posted on the department’s website. “Our hope is that New York City's financial institutions will step up and fill a void for a fair and safe auto loan product to be offered directly to consumers.”
In October 2014, Menin testified before the New York City Council Committee on Consumer Affairs that a dealer’s ability to mark up the interest rate on a retail installment sales transaction provides those dealers “the incentive to sell consumers unwanted add-ons to increase the amount of financing on a loan and the related markup.” The department, she said, found that customers who sought financial counseling from its Office of Financial Empowerment had an average of $12,000 in auto-related debt, and that 70% of those customers have annual incomes of $36,000 or less.
Menin also cited a July New York Times article on subprime auto lending as evidence that mark ups should be banned or capped in the state. That article claimed that the number of subprime auto loans has risen more than 130% in the five years since the Great Recession, with approximately one in four new auto loans going to borrowers with credit scores at or below 640 — something the news source warned could cause a subprime “bubble” similar to the mortgage crisis.
However, according to data from Experian Automotive, subprime lending in the fourth quarter of 2014 was actually down year over year, while deep subprime lending remained flat. The firm said in its State of the Automotive Finance Market report that deep subprime, subprime and nonprime were up 5.6%, 3.8% and 5.1% in volume during the quarter, respectively.
The new initiative comes at a time when both state and federal regulators are targeting subprime auto lending practices. Since July, Capital One, Consumer Portfolio Services, Santander Consumer USA, Ally Financial, GM Financial and Credit Acceptance have all received subpoenas regarding subprime auto finance originations and securitizations. In December, the New York State Department of Financial Services shut down Condor Capital Corporation, a subprime auto lender based in Long Island, for overcharging customers.
“We will not tolerate companies that abuse New Yorkers and other customers — particularly vulnerable subprime borrowers who can least afford it,” said Benjamin M. Lawsky, superintendent of Financial Services, of his department’s actions against Condor Capital. “This case demonstrates that the Dodd-Frank Act provides a powerful new tool for state regulators to pursue wrongdoing and obtain restitution for consumers who were abused. We hope other regulators across the country will consider taking similar actions when warranted.”
Last year, the DCA fielded 283 complaints about used-car dealers and secured more than $900,000 in restitution for harmed consumers. The department currently licenses 869 used-car dealerships.
The DCA did not respond to requests for comment.