Missed a loan payment? Good luck moving that car

Ms Bolender was three days behind on her monthly car payment. Her lender, CAG Acceptance of Mesa, Ariz, remotely activated a device in her car’s dashboard that prevented her car from starting. Before she could get back on the road, she had to pay more than $389, money she did not have that morning in March.

“I felt absolutely helpless,” said Ms Bolender, a single mother who stopped working to care for her daughter. It was not the only time this happened: Her car was shut down that March, once in April and again in June.

This new technology is bringing auto loans — and Wall Street’s version of Big Brother — into the lives of people with credit scores battered by the financial downturn.

Auto loans to borrowers considered subprime, those with credit scores at or below 640, have spiked in the last five years. The jump has been driven in large part by the demand among investors for securities backed by the loans, which offer high returns at a time of low interest rates. Roughly 25 per cent of all new auto loans made last year were subprime, and the volume of subprime auto loans reached more than $145 billion in the first three months of this year.

But before they can drive off the lot, many subprime borrowers like Ms Bolender must have their car outfitted with a so-called starter interrupt device, which allows lenders to remotely disable the ignition. Using the GPS technology on the devices, the lenders can also track the cars’ location and movements.

The devices, which have been installed in about two million vehicles, are helping feed the subprime boom by enabling more high-risk borrowers to get loans. But there is a big catch. By simply clicking a mouse or tapping a smartphone, lenders retain the ultimate control. Borrowers must stay current with their payments, or lose access to their vehicle.

“I have disabled a car while I was shopping at Walmart,” said Lionel M Vead Jr, the head of collections at First Castle Federal Credit Union in Covington, Louisiana. Roughly 30 per cent of customers with an auto loan at the credit union have starter interrupt devices.

Now used in about one-quarter of subprime auto loans nationwide, the devices are reshaping the dynamics of auto lending by making timely payments as vital to driving a car as gasoline.

Seizing on such technological advances, lenders are reaching deeper and deeper into the ranks of Americans on the financial margins, with interest rates on some of the loans exceeding 29 per cent. Concerns raised by regulators and some rating firms about loose lending standards have disturbing echoes of the subprime-mortgage crisis.

As the ignition devices proliferate, so have complaints from troubled borrowers, many of whom are finding that credit comes at a steep price to their privacy and, at times, their dignity, according to interviews with state and federal regulators, borrowers and consumer lawyers.

Some borrowers say their cars were disabled when they were only a few days behind on their payments, leaving them stranded in dangerous neighborhoods. Others said their cars were shut down while idling at stoplights. Some described how they could not take their children to school or to doctor’s appointments. One woman in Nevada said her car was shut down while she was driving on the freeway.

Beyond the ability to disable a vehicle, the devices have tracking capabilities that allow lenders and others to know the movements of borrowers, a major concern for privacy advocates. And the warnings the devices emit — beeps that become more persistent as the due date for the loan payment approaches — are seen by some borrowers as more degrading than helpful.

“No middle-class person would ever be hounded for being a day late,” said Robert Swearingen, a lawyer with Legal Services of Eastern Missouri, in St Louis. “But for poor people, there is a debt collector right there in the car with them.”

Lenders and manufacturers of the technology say borrowers consent to having these devices installed in their cars. And without them, they say, millions of Americans might not qualify for a car loan at all.

From his office outside New Orleans, Vead can monitor the movements of about 880 subprime borrowers on a computerised map that shows the location of their cars with a red marker. Vead can spot drivers who have fallen behind on their payments and remotely disable their vehicles on his computer or mobile phone.

The devices are reshaping how people like Vead collect on debts. He can quickly locate the collateral without relying on a repo man to hunt down delinquent borrowers.

Gone are the days when Vead, a debt collector for nearly 20 years, had to hire someone to scour neighborhoods for cars belonging to delinquent borrowers. Sometimes locating one could take years. Now, within minutes of a car’s ignition being disabled, Vead said, the borrower calls him offering to pay.

No respite as RBI unlikely to cut rates

With a repo rate cut unlikely to materialise next week, borrowers won’t see any change in their EMIs or loan repayment schedules. “If there’s no reduction in repo rate, don’t expect any cut in lending rates as well. Even if the RBI resorts to 25 basis points relief cut in repo, it’s unlikely that banks will reduce rates immediately. There could be some small tinkering by banks in retail loans. However, much will depend on the liquidity position,” said the chairman of a public sector bank.

The RBI is likely to consider the demand of bankers, including SBI chairman Arundhati Bhattacharya, for relaxation in maintenance of cash reserve ratio (CRR) by banks. The RBI had hiked repo rate by 75 basis points to 8 per cent since September 2013. A major factor that can influence the RBI’s decision making is any increase in rates by US Fed. “While it is not impossible for the RBI to lower policy rates in the face of US Fed rate increases, it requires significant correction in the external balances, comfortable forex buffers and strong growth recovery to limit volatility and maintain the attractiveness of the asset markets,” said Radhika Rao, economist, DBS Bank. ENS