The Repo Man is Getting Busy

The Repo Man is Getting Busy

More vehicle owners are falling behind as the economy slows. Many slip when they lack the money to repair cars that they’re still making payments on.

By Karen Aho
For the repo man, business is always good. But lately, it’s been better than good.

As the subprime-mortgage collapse blares in the background, “recovery service agents” have been cleaning up the wreckage of another subprime-lending mess: that of the auto industry, which in its own competitive bid for buyers has been extending longer, costlier loans to people unable to keep up with their payments.

One in three auto-loan borrowers have payments greater than $500 a month, according to consumer credit agency Experian, and 12% have been late at least once.

In a survey for the National Automotive Finance Association, BenchMark Consulting International said monthly repossessions by subprime lenders increased 15% last year.

Manheim Consulting, which analyzes the used-car market, estimated a 5% increase in the total number of repossessed vehicles to 1.4 million in 2006. The Manheim and Adesa auctions resell most of the vehicles repossessed in the United States.

“The shorthand is that for years we’ve lived beyond our means, reflected in record debt levels, and now comes the paying phase,” said Christian Weller, a senior fellow at the Center for American Progress, a progressive think tank in Washington, D.C. "Car loans have expanded as fast as mortgages, and in terms of the categories of what people borrow for, it is the second-largest.

“It fits the overall picture that all the economic-distress measures are trending upward.”

Repossession agents in areas hit by foreclosures say they’ve been picking up vehicles both from people struggling to keep their homes and from those now left without work: construction workers, pavers, landscapers and real-estate agents.

“It is actually stunning the number of cars we’re taking from people who are supporting the local real-estate market,” said J. Patrick Altes, the president of Falcon International, a recovery agency with offices throughout Florida. “It’s almost the type of thing where we see it and you wonder if anyone else sees it. . . . It’s like they turned off the spigot.”

Cracks are showing everywhere:

BenchMark found a marked rise in long loan terms, which lead to greater negative equity. For subprime lenders, who service consumers with low FICO credit scores at higher interest rates, more than 80% of new-car loans were for 61 to 72 months, up from 67% in 2005.
Among prime lenders, 61% of new-auto loans were for at least 60 months, with 17% of those exceeding 72 months, nearly double the 9% in 2005. “With longer negative-equity situations, there’s a greater chance the customer’s going to walk away,” said Walter Cunningham, the president of BenchMark.

For the first time in several years, prime lenders increased the number of loans extended to risky consumers. Those with FICO scores below 600 moved from 4% to 8% for used vehicles and 2% to 6% for new vehicles, BenchMark reported. “They’re moving downscale, and they’re also lending money to the higher-risk players,” Cunningham said.
Subprime lenders also reached down the credit scale, with 54% of deals made to buyers considered a high or superhigh risk, those with FICO scores under 549, up from 34% in 2005. “All of these are kind of pointing to higher delinquencies and higher charge-offs,” Cunningham said.

More new cars are being repossessed. According to Manheim, the average mileage of subprime repossessions sold at auction dropped from 80,164 in January 2006 to 75,099 a year later, while the average price rose from $6,359 to $7,066.

Repossession: A unique form of collection
Miss a credit card payment or an electric bill and companies bump down your credit score or cease service. Fail on the mortgage and a judge can issue a foreclosure notice. But skip a car payment or the full insurance and a guy in jeans can hook a chain to your car and tow it away, no court hearing required.

“If you think about it, that’s a pretty drastic remedy,” said Nancy Barron, a consumer lawyer in California who specializes in auto claims.

Outside California and Florida, repo agents don’t need licenses, although lenders typically require costly insurance, and several industry trade groups have strived to improve professionalism in the industry, saying most repossessions go quietly and without incident.

It depends partly on how long you intend to keep the vehicle. If you lease, here’s how to get the best deal.

Most repossessed autos are sold at dealer auctions, an average of 41 days after the repossession. The Federal Trade Commission requires that vehicles be resold in a commercially reasonable manner (for more, see this FTC fact sheet).

“After 90 days, we have to classify it as a bad debt,” said Mark Pregmon, executive vice president of SunTrust Bank. “Do we want to repo the car? Absolutely not . . . but that money’s not free. That money costs something.”

BenchMark estimates the average loss to subprime lenders at $6,000 a car.

Owners are required to pay any deficiency – the difference what was fetched at auction and the outstanding loan – as well as fees for repossession, cleaning, transport and resale, which can total about $700.

Many borrowers are stuck paying for years on a car they no longer have. To make matters worse, a replacement car costs more to finance. Even one 30-day past-due payment can ding a buyer’s credit score nearly 100 points.

If you fear the repo man . . .
Still, state laws do protect consumers (check your state attorney general’s office for guidelines), and experts can help. Here are a few tips, in descending order of crisis:

Your car has been repossessed. This is not, in fact, the end. If the lender did not conform to your state’s notification laws, a penalty can be issued against the lender’s ability to collect. Contact a consumer lawyer or advocate for help. The National Association of Consumer Advocates maintains a listing.

Some states require that owners be given a chance to make good before the car is repossessed.

“In every state the consumer has a right to redeem the car, to pay all that is due and the expenses to get the car back,” said Jon Sheldon, a lawyer with the National Consumer Law Center. “That will often be a much better deal than letting the creditor sell it.”

Act quickly. Many auctions are closed to individuals, and actions become more difficult after a sale.

Though prices vary widely, the average difference between the auction price and retail resale is about $1,500, said Tom Kontos, the chief economist at Adesa, a vehicle remarketing company.

The repo man is at your door. If this happens, you can legally object, said Sheldon. Be polite but firm, and avoid anger or violence. “If you’re objecting and they take it anyway, then it could lead to a breach of the peace,” which is illegal in every state, he said. This can buy you time to work out the problem with the lender.

Avoid any physical confrontation. Instead, document everything. Write down license-plate numbers and names, including those of witnesses.

Remove personal items from the glove compartment and car. “Anybody who’s late in their payments should remove all their belongings,” said Yvonne Rosmarin, a consumer lawyer in Massachusetts. “I don’t know how many people I’ve heard stories from who have had personal belongings in there that just disappeared.”

If you are on active military duty and you bought the car before you went on active duty (you were in the reserves, for example), a creditor cannot repossess the car without a court order, under federal law.

It depends partly on how long you intend to keep the vehicle. If you lease, here’s how to get the best deal.

You’re late, or almost late, on a payment. Contact your lender immediately and – experts say this is crucial – get a written record. Ask for a letter or e-mail confirming the vehicle will not be repossessed as long as payment is made by a certain date.

Adam Taub, a Michigan consumer lawyer, said people often say a clerk told them “OK” on the phone and then, to their surprise, their car was repossessed.

“It’s a miscommunication,” Taub said. “Or they might outright lie because they don’t want you to hide the car. Then they’ll send the repo crew out there right away.”

Either way, oral agreements don’t hold up in court, Taub said.

When you do talk to your lender, ask if you can refinance your debt. If all else fails, you can turn in the car. This is labeled a “voluntary repossession” and still knocks your credit, but it saves the repossession fees.

You’re car shopping. The No. 1 reason people lose their cars? With the long loan terms, cars are breaking down before they’re paid off.

Shop around for financing before hitting the car lots. If you have a low credit score but can show you are not currently a risk, you might be able to negotiate a better deal.

Take financing contracts home and read them carefully before signing. Understand under what terms the lien holder can repossess the car. Taub advises people not to sign binding arbitration clauses, which restrict a consumer’s ability to file a court claim.

Buy a car only if you can afford to fix it.

“The fatal, most detrimental thing that you can do is believe the car dealer when they tell you they’ll fix anything that goes wrong with it,” Taub said. "If the car dealer checks ‘as is,’ that is the same thing as the car dealer saying in writing, ‘I do not stand behind this car, no matter what I’m telling you now.’ "

Published July 3, 2007