Repossession of a car is meant to be the last resort for lenders, who can generally make more money by working out a payment plan with borrowers than by selling the car at an auction for a loss.
But the pandemic has changed the world of finance so much.
A global shortage of semiconductor chips is driving historically high prices for used cars. The surge could prompt companies that service auto loans to repossess cars too quickly to take advantage of an overheated used-car market, said Rohit Chopra, director of the Consumer Financial Protection Bureau, or CFPB.
Chopra has a message for companies that service auto loans: Don’t illegally repossess people’s vehicles. We watch.
Used car prices, a major factor in rising inflation, rose. Prices for used cars and trucks have risen 40.5% since January 2021, compared to a 12% increase for new cars, according to the Bureau of Labor Statistics.
“The concern that I continue to raise is that this is going to create incentives for more aggressive repossessing driving because you can quickly sell this back into the used car market, in some cases above Kelley’s level. Blue Book,” Chopra said in an interview.
Here’s why it should matter to the agency tasked with protecting consumer rights. Car trade-in could be financially critical for struggling consumers because more and more people don’t just use their cars to get to work — they need their car to do their job, Chopra said.
Yard workers collect food from people or perform odd jobs that require reliable transportation. Others make a living or supplement their regular income by driving for Uber or Lyft. Their cars are essential to their livelihood.
“You have a lot more people involved in hauling goods, driving, and in fact a lot of the independent construction trades are dependent on people with light trucks,” Chopra said.
In a precautionary move, the CFPB issued guidelines last week saying it would closely examine repossession practices by loan officers who may be tempted to circumvent the law in a rush to sell cars as prices go up rather than suing people for late payments.
Illegal seizures are an ongoing problem, the agency said.
Without admitting or denying any wrongdoing, in 2020 Nissan North America’s auto finance subsidiary, which handles auto loans and leases issued by Nissan and Infiniti dealerships, agreed to settle CFPB allegations that it illegally repossessed vehicles. The company agreed to a fine of $4 million and to pay up to $1 million in restitution to consumers.
In other cases, the agency said some auto loan officers have refused to release personal property found in vehicles unless defaulting borrowers pay storage fees. Repairers were criticized for sloppy accounting in which consumers were incorrectly coded as delinquents. Repairers ignored bankruptcy rules that would have – at least temporarily – stopped a repossession.
“I just anticipate the issues could get worse unless we stay ahead,” Chopra said.
Generally, auto loan officers do not come immediately to repossess a vehicle. They reach out to borrowers, giving them a chance to catch up on their loan repayments. Except that doesn’t always happen.
The CFPB has reported situations in which managers sent letters stating that their loans would not be considered delinquent if the borrower paid by a specific date. However, the cars were taken over before the date indicated in the letters. In other cases, contrary to stated payment practices, service agents applied partial payments to late fees first. Reordering payments can make people feel like they are further behind than they might be, triggering a repo.
Unscrupulous repairers have “additional incentives for risky automobile repossession practices because repossessed automobiles may command these higher prices when resold,” the agency said.
It has also become easier to locate cars destined for trade-in. The repo man is no longer just in a tow truck. Chopra said repossessions have become a lot cheaper now because cars can be tracked with GPS or through license plate recognition cameras, which can track cars destined for repossession.
Borrowers’ growing car debt compounds the problem that the CFPB is trying to avoid. As car prices continue to rise, loan amounts are also increasing, resulting in longer loan terms to make payments more affordable.
In the last quarter of 2021, the average monthly payment for new vehicles is expected to hit an all-time high of $636, according to Edmunds, an automotive market research firm. The average monthly payment for used vehicles is also expected to break a record, climbing to $520 from $437 in the fourth quarter of 2020.
Auto loans are already the third-largest consumer credit market in the United States, with more than $1.46 trillion, double the amount from 10 years ago, the CFPB said.
To prevent unfair, deceptive or abusive practices, Chopra said, the CFPB wants auto loan services to revise their policies and procedures, including call scripts, to thwart unnecessary repossession.
“We want to make sure this is systematically eradicated,” Chopra said.
Repossessions are inevitable when people are in financial difficulty and cannot repay their car loans. But the CFPB is right to insist that repairers shouldn’t wrongfully rip people’s cars off if they’re making a good faith effort to catch up.