America may not make the best cars or electronics, but our financial wizards still lead the rest of the world in creatively awful ideas. The newest pile of reeking investment garbage is a security fashioned from subprime auto title loans. Tell us about it, New York Times DealBook:


A review by The New York Times of more than three dozen [car title] loan agreements found that after factoring in various fees, the effective interest rates ranged from nearly 80 percent to more than 500 percent. While some loans come with terms of 30 days, many borrowers, unable to pay the full loan and interest payments, say that they are forced to renew the loans at the end of each month, incurring a new round of fees.

The private equity firms brewing this toxic financial sludge are doing exactly what they did when they precipitated the 2008 subprime mortgage debacle. They buy up these high interest loans in bulk, bundle them into mind-bendingly complex bond instruments, and sell them to the same suckers who bought their subprime home mortgage poison: pension funds, insurance companies, municipalities and the like. Some bond mutual funds, such as those managed by Legg Mason and Putnam Investments, have also bought these securities, so you may want to look into your employer’s 401(k) fund lineup to see if you are an indirect owner of some of this crap.

And as some states crack down on the predatory pay day loan racket, the auto title loan biz is flourishing. Over a million American households took out auto title loans in 2013, according to a survey by the Federal Deposit Insurance Corporation.

Is there more good news about cars and predatory lending? Funny you should ask:

Title loans are part of a broader lending boom tied to used cars. Auto loans allowing subprime borrowers — those with credit scores at 640 or below — to buy cars have surged in the last five years.

And if your evil little heart isn't warmed by this news, guess who suffers most from this wonderful free-market solution? Did you guess working people who absolutely must have a car to stay employed? Good for you! Here is one example cited by the Times about a woman who had trouble paying her rent after a divorce:

Ms. Pimentel took out a $3,461 title loan using her 2002 Suburban as collateral.

After falling behind, she woke up one morning last March to find that the car had been repossessed. Without it, she could not continue to run her day care business.

In spite of the fact that certain states and local governments are making it harder for these blood-sucking shitweasels job creators to operate, they are nonetheless finding innovative ways of continuing to screw serve their clients. For example, although the City of Austin allows title lenders to extend loans only for three months, a lender in that city managed to make a 24-month loan of $4,000 for car repairs to a veteran by the name of Chicosky. When he applied for the loan, he was told that he would have to fill out the paperwork and pick up his check in a nearby town.

Mr. Chicosky’s lawyer, Amy Clark Kleinpeter, said the location switch appeared to be a way to get around the rules in Austin.

The lender offered a different explanation to Mr. Chicosky. “They told me that they didn’t have a printer at the Austin location that was big enough to print my check,” he said.

It's really an inspiring example of the free market in action: crack down on one form of predatory lending, and the sharks will find new ways to feed on the poor. It's survival of the sleaziest.

[New York Times DealBook/FDIC]

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