While most of the news surrounding General Motors has, of late, rightly focused on recalls and accidents caused by the company’s defective ignition switch, those aren’t the only troubles the automaker is facing. According to a filing dated August 4, 2014, General Motors Financial Company, Inc. (GM Financial), was served with a subpoena by the U.S. Department of Justice (DOJ). The DOJ is seeking documents relating to GM’s automobile loan contracts dating back to 2007. Specifically, DOJ is looking for potential violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) in contemplation of a civil proceeding relating to possible subprime lending by GM Financial.
The FIRREA is a federal law spawned as a result of the savings and loan crisis of the 1980s, when a multitude of savings and loan executives went to jail for their financial crimes. In the subpoena, DOJ asked, among other things, for information relating to the underwriting criteria used to originate the automobile loans, along with the representations and warranties relating to those criteria.
Warning signs that subprime automobile lending is on the rise abound. The New York Times reported in July of this year that subprime auto-lending has increased 130 percent in the five years since the financial crisis (which many blame largely on subprime mortgage lending); last year, roughly one in four auto loans went to borrowers that were considered subprime. The New York Times also examined more than 100 bankruptcy court cases, dozens of civil lawsuits against lenders, and hundreds of loan documents and found that subprime auto loans can come with interest rates that can exceed 23 percent. The loans were typically at least twice the size of the value of the used cars purchased, including dozens of battered vehicles with mechanical defects hidden from borrowers.
Such loans can thrust already vulnerable borrowers further into debt, even propelling some into bankruptcy, according to the court records, as well as interviews with borrowers and lawyers in 19 states. In another echo of the mortgage boom, The Times investigation also found dozens of loans that included incorrect information about borrowers’ income and employment, leading people who had lost their jobs, were in bankruptcy, or were living on Social Security to qualify for loans that they could never afford.
As for GM, this isn’t the first time the Justice Department has looked into GM Financials’ lending practices. In December, Ally Financial, GM’s former financing arm, agreed to pay $98 million to resolve claims that it charged minority borrowers a higher interest rate than white borrowers.
In the last few years, DOJ has been exercising its authority under the FIRREA to investigate subprime mortgage lending, but this is the first known look at the automobile industry. FIRREA grants the government broad powers to bring civil claims and has more relaxed requirements for establishing liability than commercial fraud statutes. The Act was used in the wake of 2008 to prosecute liability for the crisis and specifically targeted financial institutions that misrepresented the quality of loans.
If the subpoena to GM Financial reveals evidence of subprime lending, this DOJ investigation could sweep up more automobile manufacturers. If you need more information, contact Rebecca Gilliland, a lawyer in our firm’s Consumer Fraud Section, at 800-898-2034 or by email at Rebecca.Gilliland@beasleyallen.com.
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