The New York Times editorial got it wrong
Jim Henry is a special correspondent for Automotive News.
An editorial in the Saturday, Aug. 9, issue of The New York Times made unreasonable demands on dealers and automotive lenders while grossly misrepresenting automotive lending.
The Times editorial, titled "When a Car Loan Means Bankruptcy," argued that auto dealers, like mortgage lenders, "must" be made responsible for verifying "that borrowers have the ability to repay their loans and meet their other expenses."
How far into household budgets would dealerships have to dig to do that? Would customers share such information? Imagine the added dealership paperwork such a requirement would create.
It would be akin to requiring that realtors guarantee that home buyers can pay the mortgages they sign. Lenders already do that. Why should realtors or car dealers duplicate the task, especially when they aren't set up to do so?
The editorial also called on regulators to ban dealer reserve, although it didn't use the term. At least, dealer reserve is probably what the newspaper had in mind when it said "regulators should bar the dealers from gaining additional profit by manipulating interest rates."
Manipulating interest rates? That sounds like dealers are trying to rig the market, not take a fee for helping car shoppers obtain loans regardless of their credit score.
Auto dealer and lender groups howled in protest, especially at the editorial's equating subprime auto loans with subprime mortgages. The groups insisted there's no comparison between the two.
In a rebuttal, National Automobile Dealers Association President Peter Welch wrote: "Enforcement of existing laws against a small minority of bad players is in everyone's interest, but smearing an entire industry for the misdeeds of a few is just plain wrong."
Welch said the editorial portrayed the auto lending industry "as a hotbed of deceptive practices and a harbinger of insolvency that could trigger another recession. Nothing could be further from the truth."
Welch hardly exaggerated the editorial's portrayal of auto lending.
"The mortgage industry set the stage for the recession by luring people into ruinously priced loans they could never hope to repay, then selling those loans to Wall Street in mortgage-backed securities that went bad," the editorial said. "The federal government has since tamed that industry, outlawing most of the risky and deceptive practices that led to that crisis. It must now do the same with the auto lending industry, where the practice of roping people into loans that damage them financially is all too common."
The editorial urged the Consumer Financial Protection Bureau and Federal Trade Commission "to move swiftly and aggressively."
Bill Himpler, executive vice president of the American Financial Services Association, noted some key distinctions between subprime auto loans and subprime mortgages. For one, investors bought mortgages expecting underlying assets to appreciate.
"In mortgages, people thought they were going to be flipping properties," he said. "There's no market for flipping used cars. Buying something that needs a new paint job and selling it for twice what you paid for it -- that doesn't happen in cars."
A subprime auto lender CEO, who asked not to be named, noted that brokers sold mortgages with no stake in whether mortgage payments are made. But, he said, the subprime auto lenders that sell asset-backed securities typically agree to buy back loans if they don't perform.
"It's called skin in the game," the executive said. "That's a big difference."
You can reach Jim Henry at firstname.lastname@example.org.