Inflated applications can mean that some of the most vulnerable borrowers are saddled with auto loans they can never afford to repay
Government authorities are now taking aim at a new generation of liar loans.
Only this time it is subprime auto loans.
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At their center, the people said, the investigations are examining whether dealerships are inflating borrowers’ income or falsifying employment information on loan applications to ensure that anyone, no matter what their credit quality, can buy a car.
Some of the same dynamics — the seemingly insatiable demand for loans as the market heats up and the dwindling pool of qualified borrowers — that helped precipitate the 2008 mortgage crisis are now playing out, albeit on a smaller scale, in the auto loan market. Under pressure to generate more and more loans, salesman at some used-car dealers are suspected of getting inventive.
It is not known how many subprime auto loans have been made on the basis of falsified applications. Still, such loans can corrode confidence in the booming market for securities that are created from bundled subprime auto loans. If loan applications are falsified, leading borrowers to ultimately fall behind on their bills, that could spell trouble for investors, which include insurance companies and public pension funds.
More immediately, such inflated applications can mean that some of the most vulnerable borrowers are saddled with auto loans they can never afford to repay. The loans, which often come with interest rates that soar to 29 percent, can haunt borrowers long after their cars are repossessed, further tarnishing their credit scores and plunging them into bankruptcy.
Margaret Zollner, 71, does not have a job and receives food stamps, so she was shocked when a car salesman in Queens suggested she co-sign an $18,487 loan so her friend, whom she drove to the dealership, could buy a 2013 Chevrolet. She said she repeatedly explained to the car salesman that she could barely keep up with her own bills. Still, Ms. Zollner said, a salesman falsely listed her annual income as $60,000 on the application, a copy of which was reviewed by The New York Times.
While the car was ultimately repossessed, the nightmare for Ms. Zollner is just beginning. Her credit score has fallen, now hovering around 500, and she is about to declare bankruptcy. Ms. Zollner said she felt ashamed that she signed any documents. “I just can’t believe that one stupid mistake would land me here.”
Ms. Zollner’s case is not currently under investigation. Yet interviews with government authorities and consumer lawyers, along with a review by The Times of lawsuits against dealerships in 15 states, suggest that the problem of inflated applications is widespread. The Times review of loan documents, including some produced in litigation, showed dozens of borrowers who said that dealers falsified their loan applications.
They are people like Matthew Pope, a 24-year-old Army sergeant living in Ohio, who makes roughly $20,000 but whose income was listed as $32,000 on a credit application for a 2008 Dodge Ram. And Nicole Batts, who lives in Hermitage, Tenn., and who learned after she bought a Dodge Avenger that her application included a fake copy of her driver’s license that listed the address of a sales manager at the dealership, not hers.
“I see more fraud now than I have seen in my entire career,” said Ronald Burdge, a consumer lawyer in Dayton, Ohio, who has 48 clients whose credit applications were falsified. “I am just one guy. What is happening in Atlanta or New York?”
Car dealers say their industry, like any large group of businesses, has the occasional rogue employee. But they say dealerships go to great lengths to ensure the accuracy of credit applications.
“There is no place for fraud,” said Steve Jordan, executive vice president of the National Independent Automobile Dealers Association. Still, he noted, “There is a responsibility on behalf of the consumer who signs off on the terms and drives off in the car.”
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