The Next Debt Crisis That No One's Talking About
KAI WRIGHT: I’m Kai Wright and these are The Stakes. In this episode, Don Foss, he’s the boss.
ANJALI KAMAT: Hello. Do you have a minute? We are reporters from New York Public Radio. My name is Anjali. This is Christopher.
DEALER 1 EMPLOYEE: Not interested at all.
This is Anjali Kamat, at a car dealer in Queens, NY.
ANJALI: I just want to get a sense of how the used car business works.
DEALER 1 EMPLOYEE: Not interested.
KAI: She’s trying to get information for a story about one of the most common business transactions--buying a used car.
DEALER 1 EMPLOYEE: Gotta go up the street.
ANJALI: Who do we go to?
DEALER 1 EMPLOYEE: I don't know, but go to the other stores. We don't do reporting here.
KAI: And it’s not going well....
DEALER 2 EMPLOYEE: So guys I'm going to help you another day. Not right now. I'm by myself. I'm missing one of my sales rep, you know? So please.
ANJALI: It'll just take a few minutes.
DEALER 2 EMPLOYEE: Mami, please.
KAI: But Anjali’s out here because there’s this thing that happens on these car lots, something that tells us a lot about the American dream. Queens is a place where that dream is still quite vivid in people’s minds. It’s home to hundreds of thousands of immigrants from all over the world. And they’ve come to the US looking for freedom and opportunity—which, in this country, has long been associated with owning two things: a home, and a car.
So Anjali has spent months trying to understand what happened to one young man who walked into one of these car lots, and walked out thinking he’d gotten the keys to freedom and opportunity. And what his story tells us about our larger economy.
ANJALI: Hey Celeste.
ANOUYEN JEAN CELESTE MEDA: Hey, how are you Anjali?
ANJALI: Good to see you.
CELESTE: Good to see you too.
ANJALI: Meet Anouyen Meda Anouyen Jean Francois Celeste. He goes by Celeste. He grew up in Burkina Faso, a small country in West Africa. About 5 years ago he had to leave a bad situation and came to New York. He was 19. And right from the start, Celeste was a man with a dream -- and actually quite large ambitions: He wanted to help take care of people.
CELESTE: I wanted to go to med school. You do your research of course, and then you run into those obstacles, which is, you know, medical school debt... just especially the debt, you know. That scares you because you don’t...
ANJALI: Celeste came here with a high school diploma and he’s been careful and methodical as he’s made his way in the U.S.
CELESTE: If you’re on your own here you need to mostly take the safest route and the quickest one.
ANJALI: So he did what everybody does. He turned to Google.
CELESTE: I think I remember I was sitting down and then I Googled like, “What could you do if you can't go to med school?” You know stuff like that [laughs] and then nursing pop in the review in Google there [laughs] and then yeah that's what I did, that's what I did.
ANJALI: So, he studied English for a year to improve his language skills, he applied to a nursing course at Hostos Community College in the Bronx and he got in. But now he had to figure out how to support himself as a student.
ANJALI: And were you concerned about money and surviving in America and surviving in New York?
CELESTE: I was at the beginning, yes. I was. But then I also figured there are certain jobs that you can do.
ANJALI: Like working in restaurants. He was hired at a Japanese place.
ANJALI: Were you waiting tables?
CELESTE: Yeah I was. I was a waiter at that time. People would walk into that restaurant and then just see a black guy stand there [laughs]. It was really weird, you know?
ANJALI: What did people say?
CELESTE: People was like, “How did you end up in the Japanese restaurant?” you know things like that
ANJALI: Do you like Japanese food?
CELESTE: I do. I do. Yeah I do love that. With scallion and soy sauce, oh lord!
ANJALI: But restaurant work turned out to be a hard fit for Celeste. He wasn’t quite getting enough hours, and when he did, it got in the way of his school work.
CELESTE: Once you get into the nursing program if you don't study you fail in everything you've done. You lost it, you know. I was like I need to probably do Uber because that can also help me have the same flexibility in terms of school and everything.
ANJALI: How did you hear about Uber? Like did somebody tell you about it?
CELESTE: Yes. Because one of the waiter that left, actually he left because he went to do Uber. And people were saying that you know they can make 15 some people say two thousand dollars a week in Uber you know. So I was like wow if you can make that that's fine. That's good. He said that its good if you have your own car.
KAI: Ok, so you’re thinking -- right – $2,000 a week from Uber. Maybe. But that’s not the point here for Celeste. The point is, Celeste decided his nursing school ambition was gonna require another investment -- a car. Because remember, in the long running story of the American Dream, a car is a ticket to freedom.
ANJALI: And so, its back to Google! Celeste finds a used car dealer in Queens, on Northern Boulevard.
CELESTE: So I saw the car -- a Chrysler -- it was about ten thousand advertised and then the mileage was like eight thousand which is, you know, pretty good. So when I got there I met one of their agents. So he took me to the car and it really looked basically the same.
ANJALI: So it looked pretty good.
ANJALI: You were feeling excited at this point.
CELESTE: Very. He told me that the down payment would be 4000. And then I will have 6000 to pay off you know .
ANJALI: So you’re making this mental calculation.
ANJALI: I have to pay…
CELESTE: … 4000 now.
CELESTE: I have six thousand left. And that's not bad.
ANJALI: Was $4000 a lot of money for you to make a down payment?
CELESTE: It was. Cause I had I think about 6000 at that time in my account and I think he saw that because he asked my permission to see my bank account. He was saying that he was gonna make sure I get the best deal out of everything. I was like, alright. So I kind of trusted him.
ANJALI: So at this point the agent tells him, wait right here, he’s going to look for a bank that’s willing to lend him the rest of the money.
KAI: And this is happening in real time? Like, Celeste has made a down payment, he’s given them the $4,000 from his bank account, and it’s like right there…?
ANJALI: Yeah, according to Celeste the agent looked at his bank account right there and then told him what the down payment should be.
ANJALI: And Celeste now thinks he has to pay another $6,000. Which he’s going to need to borrow.
KAI: And does he have the credit for that?
ANJALI: Not really, he’s a 21 year old student who just got here.
KAI: Right. Okay. And so then – how did they get the credit on the fly then? What’d the dealer come up with?
AD VOICE: So, need a new car? Tired of being turned down for financing? Well Credit Acceptance can help. We’re a finance company that works with car dealers across the country who specialize in helping consumers with no credit or bad credit. Alright to get started…
ANJALI: Credit Acceptance. This is actually not a bank, to clarify, it’s a finance company out of Michigan. And if you’re financing a used car, there’s a good chance you’ll run into them. They’re one of the top five lenders in the country for that.
SINGER: Well if you got no credit, the Foss can guarantee you’ll get it. Don Foss, he’s the boss, you need a car, he’ll come across.
ANJALI: Don Foss. He’s the guy who founded Credit Acceptance. This guy is a legend in the used car business.
[Dramatic violin music]
SPEAKER: There’s a lot of streams and rivers in this country but there’s only one Mississippi. And there are many great people in this industry but there’s only one like this man. And you know what he is? He’s systematic, he’s diligent, and he’s amazing. The legend Don Foss. Don?
Hey buddy, thanks man, appreciate it.
ANJALI: Foss is short, has a round smiling face, gray hair and a trim grey beard. And like Celeste he had a dream and very big ambitions. This from a film commissioned by Credit Acceptance called the Don Foss Story.
PETER CAREY: From a single dirt lot in Detroit, Michigan to the world's largest used car dealer and founder of Credit Acceptance, Don Foss made subprime auto financing an industry standard. So Don, your story pretty much epitomizes the great American dream…
KAI: I mean, you’re trolling me at this point, Anjali. Subprime lending is the American dream? The same subprime lending that broke the whole world just a decade ago?
NEWSCASTER: Breaking news here – stocks all around the world are tanking because of the crisis on Wall Street…
GEORGE W. BUSH: There is no question that there is some unsettling times in the housing market, and credits associated with the housing market.
LEHMAN CEO: Nobody including me anticipated how the problems that started in the mortgage markets would spread to our credit markets and our banking system and now threaten our entire financial system and our country.
ANJALI: Well but subprime lending is very lucrative. And doing that with car loans is what made Don Foss a legend -- he figured out that the real money on a used car lot comes from selling loans.
DON FOSS: I can't sell every car in town but I can get a piece of every deal in town.
ANJALI: And he did. Remember, he got his start in Detroit, one of the poorest big cities in America. Just ask Sylvia Boulos, a consumer lawyer from Detroit.
SYLVIA BOULOS: The Motor City is the Motor City. So it is not the Public Transit City.// And while you know the car companies want to see everybody in a car the reality is most consumers can't afford a car. They just can't.
ANJALI: So there’s an enormous market for the loans Credit Acceptance is selling across the country. Total auto loan debt is at nearly $1.3 trillion.
ANJALI: I mean everyone talks about student loans and that’s at $1.5 trillion. Auto loans are right behind. If a customer like Celeste is gonna walk into a car lot and drive out with a car, he doesn’t have a lot of credit options. And Don Foss, he got that.
KAI: Right. So what happened Celeste?
ANJALI: Ok, well, remember how Celeste was waiting for the agent at the dealership to find him a loan?
KAI: Uh huh.
ANJALI: Well he ends up waiting several hours. And then, he’s taken to another dealership. And there he’s waiting still more.
ANJALI: At this point, he’s like six hours into this process.
CELESTE: At some point I was like let me just go back home and then I come back, you know. And he categorically say no, that I have to stay so they get rid of it today.
ANJALI: He would lose the deal if he left. And then about half an hour later yet another sales rep tells him he’s found him a loan and hands him some paperwork.
CELESTE: The top page of the paper was hidden with his hands. And he only showed me the price which is fourteen thousand.
ANJALI: Remember, he thought the total cost was going to be $10,000, as advertised, and he’d already put down $4,000. So now, he’s confused.
CELESTE: And he said that since they're financing it, the bank has to have something on it which is called interest, you know. And I was all new to that. I didn’t know. Even though to me I was just going to pay back those six thousand but back to the bank. And we were all set. I didn't know that the interest would be hiding too much like that.
ANJALI: So now he thinks its 14,000 total. And Celeste figures he can manage that.
CELESTE: I had like the will to work.
ANJALI: But Kai, you know how he said the dealer covered the top part of the page?
ANJALI: Alright, let me show you.
ANJALI: Here’s a copy of his contract, and this is what he says the dealer showed him, covering the top part like this.
KAI: Uh huh.
ANJALI: So read that.
KAI: Okay so there’s, it’s $14,000.
ANJALI: Right. So now when I take away my hand see what that says.
KAI: 17 thousand dollars. Plus tax. It’s like it’s more like $19,000. The car wasn’t – it was never a $10,000 car.
KAI: Isn’t that fraud? I mean haven’t they just lied to him about the price of the car?
ANJALI: Well maybe. That’s what Celeste is alleging. And I went back to talk to those auto dealers and emailed them questions, but they just didn’t respond. But that’s only part of what happened to Celeste and the other part is definitely legal. So, when you look at the first page of the contract it actually spells out that the interest rate is 22.99 %.
KAI: Which -- a classically subprime rate.
ANJALI: And over the 5 years, that adds up.
KAI: To many, many thousands more than he would have thought.
ANJALI: Yeah, so this is what Celeste doesn’t realize when he signs that contract: including his down payment and interest, he’s actually signed up to pay Credit Acceptance $32,000…
ANJALI: …for a 2015 Chrysler 200.
KAI: For a car that was advertised as $10,000.
KAI: When does he figure all this out?
ANJALI: A week later, when Credit Acceptance mails him the contract and he finally gets to look through it.
CELESTE: So this is when I really saw now that the real price was 32,000.
ANJALI: And what was your reaction?
CELESTE: I was really sad to be honest and upset too, and naive. I felt like really stupid.
ANJALI: But honestly Kai, he shouldn’t feel that way, because today there are more subprime borrowers than ever before. And these kinds of complaints? They’re all too common when you’re slotted into that subprime marketplace. And that’s when a bank or finance company considers you to be risky to lend to because of your credit score.
KAI: And I remember this from reporting on subprime mortgages before the crash. You know, like, higher interest rates. Hidden terms. And there was often deception and fraud involved – just getting people to take out loans they just couldn’t afford and wouldn’t have taken if they understood. But, I mean, didn’t Congress regulate this kind of lending after the crash?
ANJALI: Not for auto dealers. And at the end of last year -- this is according to the NY Fed -- 7 million borrowers were more than 3 months behind on their car loan payments. That’s the highest its been since the financial crisis.
And just like with subprime mortgages there’s a trail that leads from that used car lot on Northern Blvd, Queens all the way back to Wall Street.
KAI: We’ll get to that connection in a bit. First, what happened to poor Celeste? That’s next.
KAI: Ok, take us back to Celeste. He realizes he’s got a really bad deal, and then what happens next?
ANJALI: His luck gets worse and worse.
ANJALI: Turns out he can’t actually work for Uber.
ANJALI: So you got the car but you weren't driving it?
CELESTE: No I wasn't driving it.
ANJALI: He’s waiting on a bunch of paperwork. But the point is, he’s still got to make his monthly payments. $467. Even though he can’t make money by driving the car. And this goes on for six months.
CELESTE: And I started taking out of my savings and all that. I even borrowed money from my friends too and all that. And then I was like OK it's enough I won't be able to make it. So I have to like, give back the car.
KAI: But that won’t work of course. I mean, he can’t just give the car back to the dealer and anyway, the loan is actually with Credit Acceptance.
ANJALI: Yeah, he’s definitely on the hook for whatever’s left of the loan he took out and that’s about $14,000 at this point. But what Celeste doesn’t realize is it’s probably not just Credit Acceptance that’s waiting on his money. It’s very likely that there’s also a line of banks and Wall Street investors waiting to get paid.
KAI: And explain why that’s the case.
ANJALI: It’s basically the same thing that happened with subprime mortgages before the recession--they’re pooling these loans into securities and trading them in the market. So imagine millions of subprime car loans -- like Celeste’s -- getting bundled together and turned into a new kind of product that gives investors a steady return. This market is worth tens of billions of dollars.
KAI: And we already know that’s risky to the whole system, because when all those loans go bad, the investors could lose billions of dollars. And that’s gotta be pretty common, right? I mean that people could default on these Credit Acceptance loans.
ANJALI: Well Credit Acceptance doesn’t share their default rates but from what we do know, they do seem pretty high. A few years ago they said they end up repossessing over a third of the cars they finance. But here’s what’s important: Don Foss seems to have figured out how to keep those payments coming --- even after someone defaults.
DON FOSS: I liked selling cars but I wasn't very good at the collections and I knew that since our profits were tied up in the financing and if I was ever going to make more profits we had to get better at collections. So we started Credit Acceptance for that purpose.
ANJALI: Essentially, Credit Acceptance is also a debt collection agency. Typically what happens is if a borrower defaults, like other lenders would hire outside agencies to collect the debt.
ANJALI: They might even write off some of those defaulted loans as a loss. But not Credit Acceptance.
SOURCE: I would say that their system is pretty unique.
ANJALI: I spoke to a former employee at Credit Acceptance. He agreed to explain their business model – if we didn’t use his name.
SOURCE: You're trying to get the customer to owe you as much as they possibly can. So that if they default you can garnish their wages and make a profit that way. And you're doing that by paying the dealer to inflate those contracts for you.
KAI: So how does that work?
ANJALI: They have a computer program that they’ve developed and own. This is what the thousands of dealers they work with across the country have to use when they’re looking for a loan once a customer walks in.
SOURCE: Through their CAPS automation system that dealers use to originate loans, they dictate the terms as far as profitability for the dealer.
ANJALI: Dictating to the point of actually telling dealers how much to sell the car for.
SOURCE: And then the system will let you play with the term, the interest rate, the sales price, whether or not you’re going to add a service contract.
KAI: So they can pop in a number and quickly see what their cut’s gonna be --which of course is an incentive to inflate the size of the loan.
ANJALI: Yeah and I talked to the former employee again and he actually showed me a company training manual that lays out exactly how much of a markup dealers might want to add to get them maximum profits.
SOURCE: Let's say you increase the sales price 3000 but you're charging 23.99 % interest. I mean that's a lot of money that you're adding to that loan. Right because they're already starting in a bad position. They already obviously have financial issues or else they would have good credit. So you're maximizing their monthly payment. You’re really setting them up for failure in my opinion.
ANJALI: And Kai, this really baffled me. Credit Acceptance is a public company that seems to be doing extremely well. Their stock price has gone up by 2000 percent since the last crash. But this guy is telling me they essentially didn’t seem to worry a whole lot about whether or not borrowers could pay back these loans.
SOURCE: Credit Acceptance has a very strong collections process in place once the person defaults on the loan. So if you were to walk into any local courthouse throughout the country you're most likely going to find Credit Acceptance hired attorneys there taking people to that courthouse to obtain a judgment.
KAI: So he’s saying they can get a court to enforce judgements on people… But let’s get back to Celeste. You said he quit making those monthly payments, which were like $500 right?
ANJALI: Yeah, he eventually realizes he can’t keep up, and he gets desperate. He tries to sell the car himself. But he’s almost scammed again, this time by a dealer out in Long Island. Finally Credit Acceptance repos the car and sells it at auction. But Celeste is still on the hook for over $7,200.
CELESTE: At this point I was calling them to see how much I could pay monthly to get rid of those 7000 you know. And they told me I'm gonna have to pay 125 monthly. And I said, No I can't. I don't have that money right now. But what I can do -- I could give you $50 monthly. And they told me, no. That that's not that's not going to happen.
ANJALI: Credit Acceptance sued Celeste.
JUDGE: Plaintiff Credit Acceptance Corporation vs defendant Anouyen J Meda AKA Meda J Anouyen.
ANJALI: He showed up at the Bronx Civil Court, on the fifth floor. And then this thing happened that was an incredible stroke of luck.
SHANNA TALLARICO: I met him in court. And like, I was just like, I don't know like something -- he's just a very like kind genuine person. I could see it right away.
ANJALI: He met Shanna Tallarico. She’s an attorney with the New York Legal Assistance Group. And they provide support to consumer debtors. She just happened to meet Celeste that day and take on his case.
SHANNA: Unfortunately these cases are really fact intensive and they take a lot of work and they're very time consuming and there's way more individuals who need representation than there are lawyers who can take on these cases for free.
ANJALI: She told me just about 4 percent of consumer debtors have access to an attorney here in New York City.
ANJALI: And what happens if Credit Acceptance were to win the case?
SHANNA: Well then they have a judgment. It's good for about 20 years. And they can garnish Anouyen’s wages, they can freeze his bank account, any property that he has can be liened in the future. And so there's really long term devastating consequences to these cases. And the judgements earn interest at 9 percent. The fact that people are unrepresented is very much integrated into the business model.
KAI: I mean, it sounds like the courts are really working for the debt collectors. Because I mean, they’re guaranteeing income at 9%. That is a really nice rate.
ANJALI: Yeah especially given how low interest rates are right now. And if you’re sued by a debt collector and you don’t show up, they debt collector automatically gets a judgement. Shanna says the fact that most consumers don’t have lawyers means the courts are just hearing one side of this.
SHANNA: The story they hear is just, oh they didn't make the payments. They owe us money. And that's the story that the court is hearing over and over again. They're not hearing what happened in the story behind it.
SOURCE: The court system that allows you to garnish wages is basically guaranteeing a return. Credit Acceptance knows they're going to get their money. Customer loses their job. That's fine. You wait until a customer gets another job and you take them back to court and you garnish their wages again. So it may take more time but CAC has pretty much guaranteed they're going to collect their money.
ANJALI: If he’s right, that’s a source of income not just for Credit Acceptance, but also their investors and their bondholders. And this might be one of the reasons why Wall Street loves Credit Acceptance. The company has issued over $6 billion in securities and they’re all highly rated by the ratings agencies.
KAI: So the banks and the investors on Wall Street know their securities will get returns. But what happens if the economy turns?
ANJALI: Well again we’re concerned about 1.5 trillion in student debt, and this is $1.3 trillion. And a growing proportion of that is subprime. This year, a third of new auto loans are subprime. And with rising defaults, that is concerning.
MICHAEL BARR: The risk can grow much larger.
ANJALI: That’s former Treasury official Michael Barr.
BARR: The risk can extend throughout the financial system if there are widespread failures in auto lending. Those can cause harms not only to their consumers and investors, but to the creditors of those auto lenders.
ANJALI: That’s the banks that are backing the auto lenders. Particularly in the subprime sector. We’re talking about Wells Fargo, Citigroup, Barclays, Deutsche Bank.
KAI: All familiar names from the last crash. And are any of them backing Credit Acceptance?
ANJALI: Yeah, Wells Fargo. And again, we’re talking billions of dollars. I checked the court filings, and Credit Acceptance has filed nearly 25,000 cases against debtors in New York State over the past 10 years.
ANJALI: I mean one study of the company’s lawsuits found that in Detroit, they made up nearly 12% of a single court’s docket.
KAI: Man [laughs]. Well so what happened to Celeste in court?
ANJALI: Having a lawyer like Shanna on his side made an enormous difference. She filed a motion challenging Credit Acceptance and laying out Celeste’s claims in January. Six months later, I met up with her in court and she seemed optimistic.
SHANNA: I think they’re willing to walk away from the case but we’ll discuss that today because my client is obviously out thousands of dollars for getting involved in this whole transaction in the first place. We have really strong claims.
JUDGE: So counsel for the defendant will file a notice of trial. It will then be placed on the trial calendar once that has been filed. Is there anything else…
ANJALI: Two months later, Credit Acceptance dropped their case against Celeste.
KAI: So what does Credit Acceptance have to say about all this?
ANJALI: Well, in an emailed response they claimed the legal process generated less than 2% of their collections last year. But they offered no evidence of that assertion, and they didn’t respond at all to the former employee’s allegations about inflating sales prices. And my questions about Celeste’s case? They wouldn’t even respond to that, citing privacy laws. I even went to their headquarters in Southfield, Michigan, just outside of Detroit.
ANJALI: Hi, good afternoon.
DIRECTORY OF SECURITY: Hello. How are you?
ANJALI: Good. I’m with public radio. My name is Anjali Kamat. I’m here hoping to meet one of the executives. I’ve called, I’ve emailed. I’m doing a story about subprime auto finance. I just came from New York hoping to meet someone.
DIRECTORY OF SECURITY: I understand but unfortunately we can’t allow you to meet anyone here without appointments. You have to have appointments here…
ANJALI: I didn’t get far. Not past the director of security, whose other title, listed on his badge was: Officer of First Impressions.
KAI: [Laughs] Officer of First Impressions. So good.
ANJALI: Is there somewhere else I should go, or…?
DIRECTORY OF SECURITY: You know what actually there’s not.
ANJALI: So is that company policy just not to speak to press?
DIRECTORY OF SECURITY: Well, it is. It is.
KAI: Okay, but where are the regulators on this Anjali?
ANJALI: Well, some state attorneys general are being more aggressive in going after subprime auto lenders. Right now with Credit Acceptance there are 4 active investigations in Maryland, Massachusetts, Mississippi and New York looking into potential violations of fair lending and consumer protection laws. And Credit Acceptance has also been under investigation by the Consumer Financial Protection Bureau – the CFPB -- since 2017. But there’s been no public movement on that front.
KAI: Right… And how’s Celeste doing now?
ANJALI: You know, Celeste got really lucky in the end -- and today, he’s back to pursuing his dream. He finished nursing school and just got a job at Lincoln Hospital, and he wants to treat cancer patients.
CELESTE: It's a disease that can make you feel powerless. You know. Or lost. Maybe if I can say that. Because it's like you’re there and you can't get out. You know. I had those feelings sometimes and when I was you know in my hard times.
KAI: Yeah, that’s real.
ANJALI: Yeah, and for a while, he was really desperate, and I asked him who he holds responsible for the ordeal he went through.
CELESTE: Well I guess it's all of them. They all have interests on me. They all wanted to get something out of me.
KAI: That feeling of being had, of being vulnerable as a consumer, that’s something we can all relate to, and unfortunately it’s really common because of predatory financial institutions. And if you’re on the margins of our economy - in any way -- you are most likely to have pay these exorbitant interest rates. Because poverty is very expensive.
The Stakes is production of WNYC Studios and the newsroom of WNYC.
This episode was reported by Anjali Kamat and produced with help from Christopher Johnson, Jessica Miller and Eli Newman.
It was edited by Karen Frillman, who is also our executive producer. WNYC’s investigations editor David Lewis guided the reporting.
Cayce Means is our technical director.
The Stakes team also includes… Jenny Casas, Marianne McCune, Jonna McKone, Kaari Pitkin, Christopher Werth, and Veralyn Williams…
With help from…
Hannis Brown, Michelle Harris and Kim Nowacki.
Stay in touch: You can hit me up on twitter, @kai_wright.
Thanks for listening.