Liar loans — ones in which borrowers lie about the strength of their finances — played a major role in the collapse of the subprime mortgage market that began in 2007.
Now they're back in the subprime loan market for used cars,
The New York Times reports.
Federal and state authorities, including prosecutors in New York, Alabama and Texas, are looking into the problem in the used car market, knowledgeable sources tell The Times. The investigators have so far discovered hundreds of bogus loans totaling millions of dollars.
The sources said the queries center on whether dealerships lied about borrowers' income and/or employment status on their loan applications so that the dealers could sell cars to anyone, regardless of their credit rating.
Consumer advocates say the problem is worsening. "I see more fraud now than I have seen in my entire career," Ronald Burdge, a consumer lawyer in Dayton, Ohio told The Times. He has 48 clients with falsified loan applications.
"I am just one guy. What is happening in Atlanta or New York?" he asked.
Subprime auto loans totaled $20.6 billion in the second quarter, almost twice as many as in the second quarter of 2010, according to The Times.
However, according to Experian data cited by the newspaper, banks and credit unions reported their largest year-over-year increase in seriously delinquent auto loans in the second quarter since the second quarter of 2009.
The trouble in the subprime auto loan market, which extends well beyond used car dealers, hasn't dented demand for bonds backed by the loans.
Lenders plan to issue about $2.3 billion of securities that are mostly or significantly backed by subprime auto loans and leases, according to
Bloomberg.
"It's hard to get hurt in these deals," Dave Goodson, head of securitized products at Voya Investment Management, tells the news service. The bonds have "held up well, relatively speaking."
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