Why an Arkansas town could provide a grim roadmap for America if car depots explode
As recession worries loom over America, a debt crisis already weighing on wage-earning workers in northwest Arkansas could portend a bigger problem for a nation on high alert for a flood of car seizures.
Springdale, Ark., a town of nearly 90,000 people in the Ozark Mountains, has faced the backlash of some of the pandemic’s darkest days: lenders coming in to collect outstanding debts on seized automobiles.
MarketWatch first wrote about the region’s essential workers falling behind on car loans and facing repo man in the early months of the COVID crisis, some after contracting the virus before vaccines became available.
While checking out a series on what’s fueling the pandemic auto finance boom, MarketWatch found borrowers in Springdale facing new attempts to recover, in the form of lawsuits, from an old wave of foreclosures. 2020 and 2021.
The trend matters because many US households have been squeezed by inflation that remains near a four-decade high. Beyond the Ozarks, near-record car prices have raised concerns about a potentially larger auto debt crisis, which could lead to the bursting of the latest boom in high-risk pandemic lending.
“Remember, we work with people who are living in poverty,” Mallory Sanders, an Arkansas legal aid attorney in Springdale, said of clients who now seek her help.
Most are reeling from recent lawsuits filed by lenders seeking to recover deficiency or remaining loan balances on repossessed vehicles. Many are new immigrants working in local poultry factories during the COVID crisis.
“There’s no question people took out loans they couldn’t afford to drive to work or to take the kids to school,” Sanders said. “The only way to function in this part of the country is to have a car.”
Although she also called the bulk of recent collection cases that have hit her office “predatory” lending practices, mostly from “Buy-Here, Pay-Here” car dealerships that can let salaried workers in a spiral of debt.
“These car contracts are not for these borrowers to get a car,” Sanders said. “They are designed for a defect.”
Also, there’s an advantage for lenders who don’t get their monthly car payment, she said, because they “can get 25% of a salary” by garnishing a borrower’s salary and then by reselling the vehicle to another borrower.
“It’s guaranteed easy money.”
Risky loans: repo, repetition
Springdale is about 200 miles northwest of Little Rock, Ark., with the latest census pegging the median annual household income at around $50,000. The area has long been a hub for immigrant wage workers, with the birthplace of retailer Walmart Inc. WMT,
and Tyson Foods Inc. TSN,
nearby. Hispanics make up about 40% of its population.
Many borrowers Sanders has worked with recently took out car contracts in English, signing documents despite the language barrier, she said, while a common thread was the willingness to take on car debt in the hope to move forward.
Scarce public transportation options have exacerbated inequality in the United States for decades, leading to a 75% increase in the amount borrowers owed on their cars between 2009 and 2019, according to research by consumer advocacy group US PIRG, which was published about a year before the pandemic.
The study also called for an end to discriminatory loan mark-ups, predatory lending practices and abusive car repossession tactics, noting that such tactics leave low-income households vulnerable in a downturn.
Evidence of escalating auto debt problems can be found from California to Florida in complaints filed with the Consumer Financial Protection Bureau. An Alabama borrower in May asked the consumer watchdog for help, saying interest was being charged based on the wrong amount received from the sale of a surrendered vehicle. “I only returned the vehicle due to the pandemic that has swept across the world,” the borrower wrote.
Another asked for help with a negative balance of $7,700 reported on a surrendered vehicle that the borrower said sold for $5,600.
A new subprime “variant”
The auto loan boom of the past decade kicked into high gear during the pandemic as vehicle shortages led to skyrocketing car prices that were only temporarily offset by government stimulus checks.
In some cases, Sanders said a lender made an agreement with a borrower not to pursue a deficiency after a repossession, but that was after the customer agreed to buy another vehicle and continue to make payments.
“It doesn’t make any logical sense,” Sanders said. “They can’t pay for the old car, but they get a new loan. When the borrower defaults – because he will – he will be prosecuted for both breaches.
Arkansas lenders can pursue a borrower for up to five years on an unpaid balance left on their loans. “The lawsuits are coming with a lag,” Sanders said of the cases now coming into his office.
Although it has become common for lenders to roll over the outstanding balance of a previous loan onto a new loan, the “swap treadmill” is leaving consumers deeper in unsustainable debt, Ed Mierzwinski, senior director of the Federal U.S. Consumer Program PIRG, MarketWatch said.
Even so, Buy-Here, Pay-Here dealerships “often have a different business model,” he said, adding that it has become established industry practice to lend to consumers with a history of weaker credit in the hope that they will fall behind. payments, so that the car can be repossessed and resold.
The idea of hooking a defaulting borrower to a second auto loan, “then seeking to double down and collect outstanding loan shortfalls on both loans, may be a new variant of the subprime auto loan virus,” Mierzwinski said. .
More from the series: Cracks in auto subprime, fears of a repo takeover aren’t yet drying up Wall Street funding, and scarcity is keeping car prices from collapsing on Earth