Related Articles
More automobile owners are falling behind on their payments, and a new report suggests that lenders have sometimes been overzealous in repossessing cars.
Even after borrowers have made payments as promised or received extensions on their auto loans, lenders have illegally repossessed cars, according to a Consumer Financial Protection Bureau supervisory review of auto financing practices.
Borrowing to buy a car “is one of the largest sources of household debt for American families, and many deal with unnecessary costs and challenges paying for their car,” the bureau’s director, Rohit Chopra, said in a statement.
The bureau’s review also cited problems with lenders adding on the cost of extra products or services to car loans, like extended warranties or insurance, that borrowers didn’t agree to buy. The report didn’t name specific lenders or loan servicers — companies that send out bills and collect payments for lenders. But the bureau says its examiners have routinely found problems.
Mr. Chopra said the bureau “will take action against auto-finance companies that charge fees for nonexistent services, or repossess cars after borrowers make payments.”
The American Financial Services Association, a trade group for consumer financing companies, said in an emailed statement that the consumer bureau “is quick to categorize errors as though they are malicious, intentional or profitable.”
“This mischaracterization is not helpful to consumers, lenders or regulatory bodies and is not accurate,” the group said.
The rise in delinquencies has its roots in the pandemic, when car prices ballooned and borrowers took out larger loans with higher monthly payments, a report from the Federal Reserve found. At the same time, lenders relaxed their standards in making the loans, the report said.
Delinquency rates on the loans have been rising in the last year. In the second quarter of this year, about 2.9 percent of automobile loan balances were at least 90 days delinquent, up from 2.4 percent in the second quarter of 2023, according to the Federal Reserve Bank of New York. Younger borrowers, in particular, had higher rates of delinquencies.
Lenders may seize, or repossess, cars when buyers fall behind on payments. Repossessions in the third quarter of 2024 rose 18 percent from a year earlier, according to data published this week by Cox Automotive, which estimated that 1.7 million vehicles would be repossessed this year, up from 1.5 million last year but on a par with 2019, before the pandemic.
Americans depend on cars to drive to jobs and doctor visits, and to take children to school, so losing a vehicle can have serious consequences for household finances, said John Van Alst, a senior attorney with the National Consumer Law Center.
Often, people can’t pay for their cars because of a job loss, or because the car breaks down and they can’t afford to pay for repairs or for a second, functioning car while paying off the loan for the first one, he added.
“It has a tremendous impact on families,” Mr. Van Alst said.
While some repossessions are unavoidable, the bureau said, its examiners found that lenders and servicers “engaged in unfair acts or practices,” which are likely to cause “substantial injury” to consumers.
Lenders generally try to contact the borrower by phone or mail after the borrower misses payments and may offer time to catch up, or to extend the length of the loan to avoid seizure, the consumer bureau said.
But the bureau’s review found that loan servicers and the repossession companies they hired had seized cars even after borrowers had made agreed-upon payments to get back on track or had obtained loan extensions that should have prevented seizures. The bureau said it had barred servicers from seizing cars and from failing to promptly return them when buyers had made timely payments or obtained a loan modification.
The bureau also told the car loan companies to make it clear to borrowers that extra products and services like extended warranties were optional.
Marcus Potter, a director of the American Recovery Association, an industry group, said that while mistakes could occur, instances when a car was repossessed after a borrower had reached an agreement to pay weren’t common because communication between lenders and repossession crews is now largely digital.
It’s possible there could be longer delays getting updates from smaller lenders lacking updated software systems, he said, but overall, “I would say it’s extremely rare.”
This summer, the bureau reached a $5 million settlement with Fifth Third Bank over charges of improper auto-financing practices, including that the bank contributed to repossessions by adding unnecessary insurance to thousands of borrowers’ loans.
The cost of the extra, “forced place” insurance coverage, added even though buyers had obtained their own policies, was rolled into the car loans and increased monthly payments by about $200 on average, the bureau said. This caused more than 1,000 borrowers to fall delinquent, leading to the seizure of their vehicles. Almost half of the extra insurance policies were charged to borrowers who already had their own insurance, the bureau said.
In a statement, Fifth Third said it had ended the insurance program in 2019, before the bureau had started its investigation. “We are pleased to put these historical matters behind us so we can continue to focus on creating sustainable long-term value for our shareholders, customers and employees, and in our communities,” the bank said.
Here are some questions and answers about car repossession:
What should I do if I can’t make my car payment?
When someone receives an overdue payment notice, the impulse is often to avoid the problem, but it’s best not to ignore it, said Mitria Spotser, vice president and federal policy director at the Center for Responsible Lending. “Pick up the phone and speak to the servicer,” she said. You may be able to delay a payment or get an extension of the loan to avoid losing the car. The Federal Trade Commission advises asking for the terms of any agreement in writing, in case questions arise later.
You could also try to refinance your loan with a different lender at a lower interest rate or longer loan term, which would lower monthly payments, the consumer bureau suggests, or try selling the car yourself. But first, check out the approximate market value of the car to see if you can get more than you owe on the loan.
If you can’t work out an alternate arrangement, you could consider turning the car in yourself, known as a voluntary repossession. You will still be responsible for any difference between what you owe on your contract and what your lender receives for selling the car. (If the car is sold for more than you owe, and any fees, you could receive a “surplus” payment, the F.T.C. says.)
Loan servicers and their hired contractors, sometimes known as “repo men,” may not be required to give you notice before seizing your car, depending on the state where you live. But repossession firms generally aren’t allowed to “breach the peace” in the process, which typically includes threatening violence or breaking into your locked garage to take the car.
Does a car repossession appear on my credit report?
Yes, and a repossession can stay on your credit report for up to seven years, the consumer bureau says. It can affect your ability to apply for new loans and get a favorable interest rate.
What if my car was seized improperly?
If you think your car was repossessed in error, contact your lender immediately. If you can’t resolve the situation, consult a lawyer. You may qualify for low-cost legal help. You can also contact your local consumer protection agency or the attorney general’s office in your state.
<
