1 00:00:00,120 --> 00:00:04,359 Speaker 1: Does this sound familiar? Hasty loans without verification of incomes 2 00:00:04,440 --> 00:00:08,399 Speaker 1: or job histories, default rising on loans that buyers just 3 00:00:08,560 --> 00:00:12,879 Speaker 1: can't repay outright fraud by salespeople. No, it's not the 4 00:00:12,960 --> 00:00:17,040 Speaker 1: US housing market ten years ago. It's the auto industry today, 5 00:00:17,079 --> 00:00:20,759 Speaker 1: where many car dealers are gaming the loan application process 6 00:00:21,000 --> 00:00:23,960 Speaker 1: so low income borrowers can drive off in new cars 7 00:00:24,000 --> 00:00:27,280 Speaker 1: they can't afford, and those auto loans are bundled into 8 00:00:27,280 --> 00:00:32,040 Speaker 1: securities for investors. It's classic subprime. Less than a decade 9 00:00:32,040 --> 00:00:35,760 Speaker 1: after the mortgage crisis caused the Great Recession, as explained 10 00:00:35,760 --> 00:00:40,879 Speaker 1: in movies like The Big Short, so the banks started 11 00:00:40,880 --> 00:00:44,760 Speaker 1: filling these bonds with risky and risky on mortgages Inky Baja. 12 00:00:45,640 --> 00:00:48,840 Speaker 1: That way they can keep that profit machine channing right. 13 00:00:49,960 --> 00:00:55,160 Speaker 1: By the way, these risky mortgages are called subprime. Our 14 00:00:55,240 --> 00:00:58,560 Speaker 1: guests are Patricia McCoy, professor at Boston College Law School 15 00:00:58,600 --> 00:01:01,960 Speaker 1: and author of the subpri i'm Virus, and Gary People's, 16 00:01:02,000 --> 00:01:06,760 Speaker 1: professor at Syracuse University College of Law. Patricia, sub prime 17 00:01:06,880 --> 00:01:09,759 Speaker 1: car loans have been around for a long time. Explain 18 00:01:09,880 --> 00:01:13,119 Speaker 1: what's been happening in the last eight years or so. Well, 19 00:01:13,160 --> 00:01:16,240 Speaker 1: they certainly have been around, and in the last last 20 00:01:16,280 --> 00:01:24,320 Speaker 1: eight years, UH auto lending UM became the new growth 21 00:01:24,440 --> 00:01:29,280 Speaker 1: area for subprime loans. UH mortgage lenders are basically not 22 00:01:29,360 --> 00:01:34,959 Speaker 1: willing to make subprime loans anymore, but UM car dealers 23 00:01:35,000 --> 00:01:40,320 Speaker 1: were very eager to expand their markets by selling cars 24 00:01:40,360 --> 00:01:45,920 Speaker 1: to weaker and weaker borrowers and lenders stepped in willing 25 00:01:46,040 --> 00:01:50,440 Speaker 1: to make loans to people who might have difficulty paying 26 00:01:50,480 --> 00:01:54,880 Speaker 1: back the purchase price of the car. Gary, Are there 27 00:01:54,920 --> 00:02:00,160 Speaker 1: any legal restrictions here in terms of who can get 28 00:02:00,240 --> 00:02:02,320 Speaker 1: these kinds of loans when they buy a car? Or 29 00:02:02,400 --> 00:02:05,240 Speaker 1: is it kind of a free for all? It's it's 30 00:02:05,240 --> 00:02:08,200 Speaker 1: pretty much a free for all. One of the interesting 31 00:02:08,280 --> 00:02:12,680 Speaker 1: things about god Frank is the one area that was 32 00:02:12,800 --> 00:02:16,239 Speaker 1: left out of regulation were auto dealers. And auto dealers 33 00:02:16,720 --> 00:02:20,240 Speaker 1: finance the vast majority of auto loans, and then of 34 00:02:20,280 --> 00:02:24,600 Speaker 1: course seldom UH to to finance companies, and they are 35 00:02:25,040 --> 00:02:29,000 Speaker 1: specifically excluded from regulation in your god Frank, So your 36 00:02:29,040 --> 00:02:31,360 Speaker 1: regulation you would be looking at would then be up 37 00:02:31,400 --> 00:02:34,079 Speaker 1: to the state. And I, you know, I practiced in 38 00:02:34,120 --> 00:02:37,840 Speaker 1: New York and even though the general New York Usury 39 00:02:37,880 --> 00:02:42,520 Speaker 1: Statute doesn't apply to most automans, Patricia, the name of 40 00:02:42,520 --> 00:02:46,600 Speaker 1: your book is the subprime virus. So with the auto loans, 41 00:02:46,680 --> 00:02:49,520 Speaker 1: where do we see the virus or the cracks in 42 00:02:49,560 --> 00:02:53,880 Speaker 1: the system. What's really interesting is we're seeing a replay 43 00:02:54,200 --> 00:03:01,000 Speaker 1: of the mortgage crisis in terms of the dealers don't 44 00:03:01,160 --> 00:03:06,560 Speaker 1: check whether the borrowers can UH have the ability to repay. 45 00:03:06,760 --> 00:03:10,360 Speaker 1: The lender makes the loan without checking it in most 46 00:03:10,400 --> 00:03:14,840 Speaker 1: cases here Santan Dare and then the lender sells on 47 00:03:14,919 --> 00:03:21,320 Speaker 1: the loans, packages them for sale to Wall Street. Investors 48 00:03:21,360 --> 00:03:26,200 Speaker 1: are not checking UH and are buying this stuff regardless 49 00:03:26,280 --> 00:03:32,919 Speaker 1: of the elevated default risk. Um. It's really back back 50 00:03:32,960 --> 00:03:37,920 Speaker 1: to the future. Well, so Gary, so what so let's 51 00:03:38,080 --> 00:03:40,080 Speaker 1: let's talk about the people taking out the loans. What 52 00:03:40,160 --> 00:03:44,400 Speaker 1: happens to them as you know, they they're they're getting 53 00:03:44,440 --> 00:03:47,480 Speaker 1: loans that they can't afford to pay, and it's they're 54 00:03:47,480 --> 00:03:50,040 Speaker 1: getting those loans are getting bundled. But what's happening to 55 00:03:50,080 --> 00:03:55,560 Speaker 1: the actual car purchasers here, Well, depending on how life 56 00:03:55,600 --> 00:04:00,080 Speaker 1: that circumstances go, eventually something happens and they can at 57 00:04:00,120 --> 00:04:02,640 Speaker 1: the payment that's sometimes a couple of months in and 58 00:04:02,760 --> 00:04:05,320 Speaker 1: maybe that's a year end. You know, something happens with 59 00:04:05,360 --> 00:04:08,400 Speaker 1: the car, something else happens in their life and they 60 00:04:08,640 --> 00:04:12,240 Speaker 1: they they miss a payment and or they realize how 61 00:04:12,240 --> 00:04:14,640 Speaker 1: bad off they are and then actively choose no longer 62 00:04:14,680 --> 00:04:17,520 Speaker 1: to keep paying UM. But yeah, the people lose the 63 00:04:17,880 --> 00:04:22,080 Speaker 1: car and then often get sued UM for the deficiency 64 00:04:22,120 --> 00:04:26,080 Speaker 1: that's owed after the cars repossessed, because often these cars 65 00:04:26,080 --> 00:04:29,039 Speaker 1: are sold at at huge markups with a bunch of 66 00:04:29,080 --> 00:04:32,520 Speaker 1: garbage feeds and and other things in it like extended 67 00:04:32,600 --> 00:04:36,080 Speaker 1: warranties and and other things that drive up the price 68 00:04:36,160 --> 00:04:39,080 Speaker 1: even above what the car was even remotely worth. So 69 00:04:39,200 --> 00:04:42,240 Speaker 1: these folds are well underwater. They end up losing the 70 00:04:42,279 --> 00:04:44,960 Speaker 1: car and then getting sued and you know, either filing 71 00:04:45,000 --> 00:04:48,120 Speaker 1: bankruptcy or having their wages garnished. But it's bad news 72 00:04:48,120 --> 00:04:53,040 Speaker 1: for folks. Patricia explain the allure of the subprime auto 73 00:04:53,120 --> 00:05:00,440 Speaker 1: bonds for investors and whether they're protected um from large losses. 74 00:05:01,560 --> 00:05:06,760 Speaker 1: So the the topp alur is that the interest rate 75 00:05:06,800 --> 00:05:10,799 Speaker 1: on these bonds is higher than the interest rate on 76 00:05:10,800 --> 00:05:16,080 Speaker 1: on blue chip bonds and government bonds of uh, you know, 77 00:05:16,240 --> 00:05:22,280 Speaker 1: of running around five UM, and so they're chasing yields. Uh. 78 00:05:22,520 --> 00:05:26,840 Speaker 1: The reason I think that investors are not doing adequate 79 00:05:26,920 --> 00:05:32,359 Speaker 1: due diligence is twofold. Um. They think that the higher 80 00:05:33,040 --> 00:05:37,640 Speaker 1: interest rate will compensate them for the higher risk and 81 00:05:37,720 --> 00:05:39,960 Speaker 1: at the end of the day, even if the default 82 00:05:40,040 --> 00:05:43,360 Speaker 1: rate is high, they'll get a high enough rate of 83 00:05:43,440 --> 00:05:48,480 Speaker 1: return to to make money. Uh. The other thing is 84 00:05:48,520 --> 00:05:54,440 Speaker 1: they're they're betting on the fact that the securitization has 85 00:05:54,560 --> 00:05:59,760 Speaker 1: been designed with a big safety cushion to absorb losses 86 00:05:59,800 --> 00:06:03,719 Speaker 1: and to protect them from losses. Uh. Last time in 87 00:06:03,760 --> 00:06:06,200 Speaker 1: two thousand and eight, it didn't quite turn out that way, 88 00:06:07,480 --> 00:06:10,440 Speaker 1: just quickly in about thirty seconds, Gary, it will it 89 00:06:10,440 --> 00:06:13,599 Speaker 1: be different with the auto loans than it was with 90 00:06:13,680 --> 00:06:16,480 Speaker 1: the with the marriages. As far as protection shouldn't for 91 00:06:16,520 --> 00:06:21,560 Speaker 1: the investors, I think, well, you know, I think people 92 00:06:21,600 --> 00:06:23,640 Speaker 1: are going to lose money eventually like they did in 93 00:06:23,760 --> 00:06:27,360 Speaker 1: the housing market. You can't. You can't loan people money 94 00:06:27,400 --> 00:06:30,520 Speaker 1: that you know they can't pay back on an asset 95 00:06:30,560 --> 00:06:33,960 Speaker 1: that's appreciating value would make money even when you're selling 96 00:06:34,000 --> 00:06:38,480 Speaker 1: people cars at interest. You know, they said this ten 97 00:06:38,560 --> 00:06:40,719 Speaker 1: years ago, and housing, Oh well we're protected. Well, of 98 00:06:40,760 --> 00:06:43,560 Speaker 1: course they weren't. We've been discussing how less than a 99 00:06:43,640 --> 00:06:47,360 Speaker 1: decade after the Great Depression, the financial industry has embraced 100 00:06:47,400 --> 00:06:51,120 Speaker 1: another type of subprime debt, auto loans. Our guests of 101 00:06:51,160 --> 00:06:54,359 Speaker 1: Patricia McCoy, professor at Boston College Law School and author 102 00:06:54,400 --> 00:06:57,840 Speaker 1: of the sub Prime Virus, and Gary People's professor at 103 00:06:57,880 --> 00:07:03,320 Speaker 1: Syracuse University College of Law. Gary, let's talk about the 104 00:07:03,480 --> 00:07:07,960 Speaker 1: US auto loan sector. It's small compared to the eight 105 00:07:07,960 --> 00:07:11,200 Speaker 1: point four trillion dollar mortgage market. It's about one point 106 00:07:11,240 --> 00:07:14,760 Speaker 1: one trillion dollars in loans compared to the mortgage market. 107 00:07:15,160 --> 00:07:17,840 Speaker 1: So no one is suggesting that this will cause the 108 00:07:17,880 --> 00:07:20,920 Speaker 1: next crisis. But is there a trickle down effect or 109 00:07:20,920 --> 00:07:25,840 Speaker 1: any lasting consequences for the industry. Well, it's hard to 110 00:07:25,840 --> 00:07:30,440 Speaker 1: know for sure. But obviously, if you have potentially thousands 111 00:07:30,520 --> 00:07:34,720 Speaker 1: of individuals who are losing their ability, uh to get 112 00:07:34,760 --> 00:07:38,640 Speaker 1: themselves around work and otherwise, that's going to have effects. 113 00:07:38,680 --> 00:07:41,160 Speaker 1: And then I think you're gonna have ripples from the 114 00:07:41,240 --> 00:07:44,600 Speaker 1: number of defaults. I mean, the number of defaults are 115 00:07:44,640 --> 00:07:48,040 Speaker 1: you know, significant, And I think that will will have 116 00:07:48,120 --> 00:07:53,200 Speaker 1: some effects. Patricia, when when we talk, when we talk 117 00:07:53,280 --> 00:07:54,960 Speaker 1: about the way that we think about the way that 118 00:07:55,000 --> 00:07:59,360 Speaker 1: the dealers have dealt with this, how exactly are they 119 00:08:00,120 --> 00:08:03,520 Speaker 1: encouraging this sort of these sort of loans. And how 120 00:08:03,600 --> 00:08:05,440 Speaker 1: is it that the dealers are you know, what are 121 00:08:05,440 --> 00:08:10,280 Speaker 1: they doing to be complicit in how these loans happen. Well, 122 00:08:10,440 --> 00:08:14,360 Speaker 1: the dealers in many cases are actually the ones who 123 00:08:14,400 --> 00:08:19,320 Speaker 1: are having the borrowers complete the loan applications. And the 124 00:08:19,480 --> 00:08:24,520 Speaker 1: dealers don't make money unless they sell a car. And 125 00:08:24,640 --> 00:08:27,200 Speaker 1: with these borrowers, they're not going to sell the car 126 00:08:27,800 --> 00:08:32,760 Speaker 1: unless the borrower can get financing. That creates a really 127 00:08:32,800 --> 00:08:41,160 Speaker 1: bad incentive for some unfortunately dishonest dealers to help the 128 00:08:41,240 --> 00:08:45,720 Speaker 1: borrower fill out the loan application by inflating their income 129 00:08:47,040 --> 00:08:50,600 Speaker 1: or saying that they work in a fancier job than 130 00:08:50,640 --> 00:08:55,200 Speaker 1: they do. Um. And so we call these lawyers loans 131 00:08:55,400 --> 00:09:00,360 Speaker 1: and and unfortunately with fantan Dare, a lot of funds 132 00:09:00,440 --> 00:09:03,679 Speaker 1: turned out to pay liars Lunds and Gary. Let's talk 133 00:09:03,679 --> 00:09:06,920 Speaker 1: about Santon Dair, which has agreed to pay twenty six 134 00:09:06,960 --> 00:09:10,880 Speaker 1: million dollars to settle an investigation into predatory subprime auto 135 00:09:10,920 --> 00:09:14,760 Speaker 1: loans by Massachusetts and Delaware. Taught about the partnership between 136 00:09:14,880 --> 00:09:20,600 Speaker 1: Fiat Chrysler and Banco Santander. Well, it's probably a little 137 00:09:20,640 --> 00:09:24,240 Speaker 1: to outside of my area of expertise. UM. I'm mostly 138 00:09:24,280 --> 00:09:28,920 Speaker 1: on the uh, the consumer end, and what I see 139 00:09:29,160 --> 00:09:32,679 Speaker 1: is that, you know, these dealers are kind of inco 140 00:09:32,760 --> 00:09:38,160 Speaker 1: hoots with with the finance companies. They know that. I 141 00:09:38,160 --> 00:09:40,760 Speaker 1: think these finance companies know what these dealers are doing, 142 00:09:41,120 --> 00:09:44,760 Speaker 1: pushing these loans with nobody that people can't afford UM, 143 00:09:44,840 --> 00:09:48,360 Speaker 1: and you know they these lives are being pulled by 144 00:09:48,400 --> 00:09:52,920 Speaker 1: the dealership UM, and the the finance companies are are 145 00:09:52,960 --> 00:09:55,720 Speaker 1: complicit in that they know what's happening. They're not bothering 146 00:09:55,760 --> 00:09:59,400 Speaker 1: to to to check to make sure the dealership UM 147 00:09:59,600 --> 00:10:03,120 Speaker 1: is doing what uh, you know, confirming that these incomes 148 00:10:03,120 --> 00:10:05,800 Speaker 1: are even remotely close to what they're uh. I mean, 149 00:10:05,800 --> 00:10:08,880 Speaker 1: this is happening on a regular basis where these folks 150 00:10:08,880 --> 00:10:12,000 Speaker 1: are being steered into loans where that the documentation is 151 00:10:12,040 --> 00:10:15,640 Speaker 1: clearly a complete sabrogation. Can you talk a little bit 152 00:10:15,640 --> 00:10:22,280 Speaker 1: about Saint and Dair and Chrysler. Well, Chrysler is up 153 00:10:22,320 --> 00:10:26,559 Speaker 1: the big three US auto dealers, the smallest one and 154 00:10:26,960 --> 00:10:29,520 Speaker 1: UH and the weakest in terms of the demand for 155 00:10:29,559 --> 00:10:33,800 Speaker 1: its cars, and so it was quite eager to extend 156 00:10:34,040 --> 00:10:41,240 Speaker 1: its customer base down the credit spectrum to weaker UM consumers. 157 00:10:41,280 --> 00:10:45,440 Speaker 1: But to do that it needed a financing arm, and 158 00:10:45,640 --> 00:10:52,360 Speaker 1: Santon Dair was conveniently very eager itself to expand into 159 00:10:52,400 --> 00:10:57,760 Speaker 1: auto financing and particularly subprime. One of the reasons that 160 00:10:57,840 --> 00:11:02,880 Speaker 1: Santon Dair was attractive was that it had a computerized 161 00:11:03,800 --> 00:11:09,400 Speaker 1: algorithm for analyzing the credit worthiness of sub time borrowers, 162 00:11:10,280 --> 00:11:15,559 Speaker 1: and supposedly it was foolproof. Well, uh, didn't turn out 163 00:11:15,600 --> 00:11:20,920 Speaker 1: that way. Well, Gary, so what what do you have 164 00:11:21,040 --> 00:11:24,200 Speaker 1: these legal actions taken against Santon Dair? What what did 165 00:11:24,920 --> 00:11:34,880 Speaker 1: the attorney's general find here? Gary? About thirty seconds, I'm 166 00:11:34,920 --> 00:11:38,880 Speaker 1: probably not the best prepared to answer that question if 167 00:11:39,559 --> 00:11:42,880 Speaker 1: it's not an entity that I've been involved with. So 168 00:11:43,040 --> 00:11:45,520 Speaker 1: I don't know the answer to that one. All right. Um, 169 00:11:45,640 --> 00:11:48,920 Speaker 1: we do know that Santander agreed to pay twenty six 170 00:11:49,000 --> 00:11:53,480 Speaker 1: million dollars to settle an investigation by Massachusetts and Delaware, 171 00:11:53,480 --> 00:11:55,800 Speaker 1: and it's been subpoenut or question by a group of 172 00:11:55,840 --> 00:11:59,880 Speaker 1: about thirty states regarding its auto loane underwriting and secure 173 00:12:00,000 --> 00:12:03,640 Speaker 1: deization activities. Thank you both for being on Bloomberg Law. 174 00:12:03,679 --> 00:12:07,920 Speaker 1: It's been a very interesting. Patricia McCoy, professor at Boston 175 00:12:08,000 --> 00:12:11,440 Speaker 1: College Law School and author of the Subprime virus and 176 00:12:11,480 --> 00:12:15,439 Speaker 1: Gary People's professor at Syracuse University College of Law. Thank 177 00:12:15,480 --> 00:12:15,840 Speaker 1: you both.