Elizabeth Warren's brainchild watchdog agency is cracking down for the first time on a used car dealer that also acted as an auto lender for allegedly harassing customers who were late on their payments.
The Consumer Financial Protection Bureau, conceived by Sen. Warren (D. Mass.) during the financial crisis, fined Phoenix-based DriveTime Automotive Group, Inc., the country's largest "buy here, pay here" lender, $8 million on Wednesday. As part of a settlement agreement, DriveTime and its finance company, DT Acceptance Corporation, said they would change debt collection practices.
"Buy here, pay here" auto companies sell used cars, but consumer advocates say they operate more like subprime lenders. The companies offer low-income customers with poor credit ratings auto loans with interest rates that can top 30 percent, according to a 2011 Los Angeles Times investigation.
DriveTime’s average customer has an annual income of between $37,000 and $50,000, a FICO credit score between 461 and 554 and paid an average of 19 percent in interest on their loan, according to the CFPB. (According to FICO, a credit score of 660 or higher is typically considered "good.")
People who buy cars at these types of dealerships usually return to the lot to make payments, often in cash -- hence the term “buy here, pay here.” The companies also expect some of these buyers to fall behind on their payments, consumer attorneys say, which can benefit the dealer.
“When a customer defaults, the company can repossess the car and resell it again, often numerous times,” said John Van Alst, the director of the National Consumer Law Center’s “Working Cars For Working Families” project, which advocates for policy reform and transparency in used car and car finance markets.
DriveTime would repeatedly call customers who fell behind for payments, according to the CFPB settlement. Where the company fell afoul of the law, CFPB alleged, is when it called people at work, risking them getting fired. One DriveTime customer was called 30 times at work by the company’s collectors, even after the customer had asked them to stop, according to court documents. The CFPB charged that DriveTime management actually encouraged this tactic.
“Consumers who purchase a car at a buy-here, pay-here dealer deserve to be treated fairly,” said CFPB Director Richard Cordray. “DriveTime harassed and harmed countless consumers, many of whom were economically vulnerable.”
“DriveTime strives to comply with all applicable laws and provide exemplary service to our customers,” said company general counsel and Executive Vice President Jon Ehlinger in a prepared statement. “DriveTime had taken and has continued to take steps to enhance its customer experience, and loan servicing activities, including the handling of do not call requests.”
According to the settlement, DriveTime employes 290 collectors in order to secure its owed payments.
The DriveTime agreement marks the CFPB's first action against a “buy here, pay here” company, and signals that the growing federal agency -- newly minted in 2010 as part of the Dodd-Frank financial reform law -- is watching the industry, which has ballooned in size in recent years.
The number of cars sold by “buy here, pay here” lots in the U.S. grew from 1.3 million in 2001 to 2.4 million in 2010, according to the 2011 Los Angeles Times investigation. More recent data is hard to come by. “BHPH [buy here, pay here] is a fractured industry with few large or publicly traded participants, making it difficult to estimate transaction volume,” says the website of the Federal Deposit Insurance Corporation.
“Buy here, pay here” dealers represent around 10 percent of the overall auto finance market, said Chris Kuklas of the Center For Responsible Lending, research group that fights predatory lending practices. The overall auto finance market is worth $940.9 billion, according to the Federal Reserve.
At DriveTime, where at any given moment about 45 percent of customers were delinquent on their payments, calling people at work wasn’t the only law the company broke, regulators charged.
The settlement also alleges that the company inaccurately reported its customers to credit bureaus, even when DriveTime had “reasonable cause to believe” the information it was reporting was wrong. Regulators charged that when DriveTime repossessed its customers’ cars, it told the three biggest credit bureaus in the country that the repossessions had happened more recently than they actually had.
Having a car repossession listed on your credit report dings your credit score, and can make it more difficult to find a job or be approved for a credit card or mortgage.
DriveTime took steps to improve the way it reported customers to credit bureaus both before and during the CFPB investigation, Ehlinger said. The company is “look[ing] forward” to “improving its customer service and compliance practices” in coming years, he added.
Federal authorities have recently been cracking down on the way lenders sometimes unfairly harm consumers’ credit reports. Over the summer, the CFPB fined an auto lender in Texas $2.75 million for allegedly providing inaccurate information about borrowers to credit agencies for years.
“We’re focusing on accuracy with credit reporting because credit ratings have such an impact on people’s financial well-being,” CFPB spokesman Sam Gilford told The Huffington Post on Wednesday.
Kuklas said that "buy here, pay here" companies fall under the CFPB’s authority because they are more like debt collectors than car dealers. The agency has recently tried to clamp down on the tactics debt collectors use to get people to make payments on delinquent bills.
In August, the CFPB took action against a Georgia debt collection firm that it alleged operated like a “factory” in suing hundreds of thousands of people for old debts, while spending less than a minute reviewing each lawsuit for accuracy.
One out of every three Americans has an unpaid bill “in collections,” according to a July study by the Urban Institute, a Washington, D.C., think tank. Debts in collections can harm your credit score and even lead to your savings and wages getting seized.
CORRECTION: A previous version of this article stated that the number of "buy here, pay here" lots grew from 1.3 million in 2000 to 2.4 million in 2009. In reality, the number of cars sold by "buy here, pay here" lots grew from 1.3 million in 2001 to 2.4 million in 2010, according to a Los Angeles Times investigation.