Lenders are attaching kill switches and GPS locators to cars so they can shut the vehicles off and repossess them if their owners miss loan payments.
The increasingly popular tactic used by banks and car dealerships is raising concerns among consumer advocates, who say the technology violates the privacy of debtors. It also echoes the aggressive tactics associated with toxic mortgages, which inflated a housing bubble that burst in 2008 and wrecked the global economy.
"It's almost entirely being used on subprime people with low incomes or blemished credit," Chris Kukla, senior vice president at the Center for Responsible Lending, told VICE News.
For those unfortunate enough to have little choice but to accept the technology on their car in exchange for an auto loan, the devices are Orwellian.
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The New York Times recently published a story about a bank turning off a mother's 2005 Chrysler van with a so-called "starter interrupter" as she was preparing to take her sick 10-year-old daughter to a hospital emergency room. The Times interviewed a loan collector who shut off cars using his smartphone while shopping at Walmart. He claimed to call debtors first before disabling their cars. The Times said around a quarter of new subprime auto loans require debtors to install the devices on their vehicles.
Another Times piece noted that interest on subprime auto loans can reach 23 percent, while another reported that car repossessions have increased by 143 percent this year compared to 2014.
The Times stories say Wall Street traders are promoting the trend by securitizing auto loans — or packaging and selling them as financial instruments to investors who receive a share of the loan payments. It's the same shell game that created billions, if not trillions, of dollars of toxic assets that caused the 2008 crisis when waves of borrowers went into default.
Worse, the GPS and kill switch devices are fueling the process because they are making it easier for bank and car dealerships to lend to people who probably won't be able to pay back the loans — the very same conditions that gave rise to the 2008 collapse.
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"It's not like it's driving down the cost of the credit," said Kukla. "This allows lenders to make even riskier loans. They push the envelope further because they know they can track down the car in an instant."
At the same time, the devices raise questions about whether it's fair or ethical for a bank to have information on their debtors' whereabouts. "Certainly there are privacy concerns," Kukla said. "A GPS locater can track where you've been and where you are going."
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Last month, speaking at a conference in Las Vegas — ground zero for the housing bust — US Treasury official Darrin Benhart said he was keeping an eye on the $262 billion auto loan market.
He said banks and dealerships have given out 13 percent more loans in 2013 compared to the year before, and 8 percent more loans this year compared to 2013. At the same time, debtors who defaulted on loans in the fourth quarter of 2013 owed around $7,600 to their creditors, a 12 percent increase from the year before.
Benhart didn't comment on the GPS or starter interrupters. He also didn't say whether or not an auto loan bubble was forming.
Kukla said an auto loan bubble wouldn't necessarily cause widespread economic collapse — but it would cost many jobs.
"For most people to get to work, they have to have a car," he said.
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