Johnson discusses trend in auto, home loan defaults

SEPTEMBER 10, 2008 – The City Sentinel interviews Eric Johnson for his insight on the correlation between the sub-prime mortgage crisis and the increase in sub-prime auto loans defaults. Auto loan defaults are following the trend of their home loan cousins in the current difficult economic marketplace said Johnson, who specializes in auto financing laws. “It’s a real interesting time right now,” he said. “It’s kind of a tandem – when you see a lot of sub-prime mortgages, you tend to see more sub-prime auto leases.”

Johnson explained that the sub-prime theory of financing is a natural component to both types of lending, which makes it possible for those with lower credit ratings to obtain cars, homes or in some cases, both. As a result of the increasing amount of loan foreclosures, he said federal and state regulators have been making and adjusting rules at a higher rate.

Sub-prime attention focused on auto loans

Rod Jones, Sentinel Editor, The City Sentinel

SEPTEMBER 10, 2008 – While most of the credit-crunch news in America has focused on problems with home loan foreclosures, the rise in defaults on auto loans has flown under the radar.

But according to Eric Johnson of the Phillips McFall McCaffrey McVay & Murrah law firm downtown, auto loan defaults are following the trend of their home loan cousins in the current difficult economic marketplace.

“It’s a real interesting time right now,” Johnson, an attorney who specializes in auto financing laws, said. “It’s kind of a tandem – when you see a lot of sub-prime mortgages, you tend to see more sub-prime auto loans.”

Johnson explained that the sub-prime theory of financing is a natural component to both types of lending, which makes it possible for those with lower credit ratings to obtain cars, home or in some cases, both.

As a result of the increasing amount of loan foreclosures, he said federal and state regulators have been making and adjusting rules at a higher rate.

Right after the terrorist attacks of Sept. 11, 2001, regulators were more concerned with encouraging lenders to know more about who was getting loans. But Johnson said the regulators have focused on the “predatory lending rule” in the past couple of years because of an increasing rate of loan defaults. Predatory lending refers to those who ignore or attempt to cover up a customer’s lack of ability to repay a loan.

While sub-prime loans are perfectly legal, he described its current problems as “the slippery slope of making ends meet,” where people get in over their heads while trying to balance their payments against their income.

As customers overextend their credit, their interest rates tend to increase making what they couldn’t afford in the first place less affordable. The Federal Trade Commission (FTC) offers several nuggets of advice for those in the market for a new or used car.

“Sometimes, dealers offer very low financing rates for specific cars or models, but may not be willing to negotiate the price of these cards,” according to the FTC. “To qualify for the special rate, you may be required to make a large down payment. With these conditions, you may find that is sometimes more affordable to pay higher financing charges on a car that is lower in price or to buy a car that requires a smaller down payment.”

The federal regulator also strongly recommends making sure to have a contract in hand before driving off the lot, and that the contract has all blanks filled in.

Johnson said Oklahoma probably hasn’t had as hard a time with the credit crunch seen nationally, likely because the state’s economy is on steadier footing. He said the trends in home foreclosures and auto loan defaults are more evident in the states with worse economies.

Nonetheless, he said lenders in Oklahoma will have to keep up with the frequent new rule changes from the federal regulators, a process that is easier for bigger, national companies than mom-and-pop auto dealers because they often lack the amount of legal council.

The most recent major rule change that could curb some predatory lending practices is called the “Red Flags” rule, which involves how creditor seek out and use credit reports. The rule goes into affect Nov. 1 and applies to a large variety of businesses including finance companies, auto dealers, credit unions and even telecommunications companies and utility companies.

The rule requires financial institutions take more steps to implement and maintain an Identity Theft Prevention Program. Johnson said the rule could be considered a tool against predatory lending because it requires lenders to acknowledge a client’s credit “freeze” status and various credit problems rather than ignore them.