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Buy Here Pay Here chain is probed

Watchdog issues subpoena seeking information on potential loan abuses.

April 21, 2012|By Ken Bensinger, Los Angeles Times
  • Buy Here Pay Here dealers sell autos to buyers with damaged credit using in-house financing. But consumers complain that the deals often are unfair.
Buy Here Pay Here dealers sell autos to buyers with damaged credit using… (Gary Friedman, Los Angeles…)

The nation's top consumer watchdog is investigating one of the largest Buy Here Pay Here used car chains, the latest in a rising tide of scrutiny of the little-known industry.

The Consumer Financial Protection Bureau issued a subpoena seeking information and business documents from DriveTime Automotive Group in Phoenix, according to a regulatory filing this week.

DriveTime, with 90 dealerships nationwide, is the first Buy Here Pay Here company to be investigated by the federal agency that was created in 2010 as part of the overhaul of financial regulations.

The Buy Here Pay Here industry consists of used car dealers that lend to people with damaged credit by offering direct, in-house financing rather than using outside lenders like banks or credit unions.

But borrowers have complained about high prices, steep interest rates, onerous payments and quick repossessions that often ruin their credit and push them into bankruptcy.

Richard Cordray, the bureau's director, said in January that alleged abuses in the Buy Here Pay Here industry were a priority for his agency.

DriveTime could not be reached for comment. In its filing with the Securities and Exchange Commission, it said that "the CFPB has not alleged a violation…of any law" and that the company was cooperating with the agency.

The subpoena, a civil investigative demand issued April 12, marks the most prominent step yet taken to rein in an industry that has for years flourished below the radar of regulatory scrutiny. It comes as public awareness of its practices grows.

This week, the Ohio attorney general filed lawsuits against two Buy Here Pay Here dealerships for alleged violations of state consumer protection laws, including failing to give customers proper disclosures of interest rate and finance charges, rolling back odometers and repossessing cars without warning.

And in the California Legislature, the Senate Banking and Financial Institutions committee approved a bill Wednesday that would cap interest rates that Buy Here Pay Here dealers can charge. It also would require them to register as consumer lenders with state lending regulators.

Two other bills, both in the California Assembly, will be subjects of committee hearings next week.

The actions followed stories published in The Times last fall that examined the business tactics of the industry, which has thrived in a down economy. Nationwide, an estimated 30,000 such dealerships sell more than 2 million used cars each year.

DriveTime operates lots in 17 states, including four in the Los Angeles area. As a central component of its business model, DriveTime bundles and sells many of its auto loans as securities, in a manner similar to lenders creating mortgage-backed securities.

Last year, DriveTime issued three auto-loan-backed securitizations worth a total of almost $710 million, and this month, it expects to raise $235 million in an additional sale.

The Ohio lawsuits, filed Wednesday in state court, were against Keep it Moving Auto Sales in Cleveland and Auto Finance in Columbus, both of which had been subject to dozens of consumer complaints in the past two years that prompted an investigation by the state's top prosecutor.

"In both of these cases, we found blatant violations of consumer financing laws," said Ohio Atty. Gen. Mike DeWine. "The purchases were often one-sided, heavily favoring the dealer and lacking required disclosures."

According to one of the complaints, Auto Finance, which operates two lots, made some customers sign a "Right of Repossession" form that allowed the dealership to repossess without notice and required customers to pay off the full value of the loan in the event of a default if they wished to get the car back.

Keep it Moving Auto Sales, meanwhile, charged some customers an unlawful $250 finance charge to originate loans, sold salvaged vehicles without identifying them as such and inaccurately disclosed interest rates on contracts, the other complaint alleged.

Both dealers failed, in some instances, to apply for titles in the names of vehicle purchasers, the suits said.

Keep it Moving Auto sales did not return a call seeking comment. Calls to three different Auto Finance lots went unanswered.

Ohio is seeking damages of up to $25,000 per violation of the state's consumer finance laws, as well as fines for violating state title and odometer laws.

DeWine also released a consumer warning about Buy Here Pay Here dealers, urging potential car buyers to get everything in writing prior to making a deal.

"Consumers need to understand their full financial obligations when buying from a Buy Here Pay Here dealer," DeWine said. "In some cases, consumers' vehicles are repossessed within days or weeks of the purchase because the dealer didn't clearly disclose when their payments are due."

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