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Wall Street Journal: An SUV, a Loan and a Lawsuit

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Wall Street Journal 

By Aruna Viswanatha

Olga Arroyo said she went to an auto dealership in the Bronx last year planning to cosign a car loan for her 39-year-old son.

But the 56-year-old Manhattan resident, who has good credit but monthly income of only $1,354 in Social Security benefits, said she unwittingly left with a $51,000 car loan in just her own name. How she got the loan, funded through J.P. Morgan Chase & Co.’s auto-financing arm, is the subject of a lawsuit filed this past week in U.S. District Court for the Southern District of New York. The suit claims the bank and the dealership violated federal consumer-protection statutes and unlawfully deceived her into purchasing a car she didn’t want and couldn’t afford.

Nick Tayeh, the general manager at City World Ford, said the dealership had done nothing wrong, and that Ms. Arroyo had wanted to purchase the car herself. He said it was a case of buyer’s remorse and is willing to help them trade in the vehicle.

Representatives of J.P. Morgan declined to comment, citing the pending litigation.

The lawsuit also alleges the auto lender failed to ensure the borrower was able to repay the loan because of what it described as lax underwriting practices.

U.S. authorities have been scrutinizing underwriting and other practices at auto lenders and dealers, according to company disclosures and statements from U.S. officials.

The Justice Department and the Securities and Exchange Commission are examining whether disclosures on pools of auto loans sold as securities mirror problems that surfaced in the mortgage market ahead of the financial crisis, with a focus on subprime loans. Many of those financial-crisis cases alleged that mortgage-bond deals didn’t disclose the extent to which they were backed by poorly underwritten loans. Some of the largest U.S. banks have paid billions of dollars in penalties to resolve those allegations.

The Justice Department and the Consumer Financial Protection Bureau are also investigating allegations of racial discrimination in the interest rates and fees charged on auto loans. Ms. Arroyo’s suit doesn’t raise a claim of racial bias.

The finance arms of Toyota Motor Corp., Honda Motor Co. and J.P. Morgan have disclosed Justice Department probes related to dealer pricing, with Toyota and Honda divulging related CFPB inquiries. Santander Consumer USA Holdings Inc., a unit of Banco Santander SA, General Motors Co.’s auto-financing arm and Ally Financial Inc. have disclosed receiving subpoenas or other requests from the Justice Department and SEC asking for information related to subprime and other auto-loan activity in the past year.

J.P. Morgan said in February that it is in talks with the Justice Department about “potential statistical disparities” in markups charged to different races and ethnicities by auto dealers who originate loans the bank purchases.

Fueling the concern are rising delinquencies in auto loans. As of the end of March, 8% of subprime auto loans originated in the first quarter of 2014 and 2.6% of all auto loans made in that period were delinquent more than 30 days, according to Moody’s Analytics. The overall percentage is the highest level of early loan trouble since 2008, when such delinquencies rose above 3%.

Ms. Arroyo, who is considered a creditworthy, or prime, borrower, said she didn’t have the income to make the monthly $831.09 payments on the 2015 Ford Explorer and shouldn’t have been given the loan. Her son, Edwin Arroyo, has continued to make the monthly payments and use the vehicle, she said.

“I just want my name cleared [off the loan],” Ms. Arroyo said in an interview. Ms. Arroyo said she doesn’t recall signing any loan application. Ms. Arroyo said she was asked to sign several other forms, which she said were partially obscured when presented for her signature. Mr. Tayeh denied any wrongdoing on the part of the dealership.

Mr. Arroyo said in an interview he had never before bought a car from a dealership, so he didn’t negotiate on the price and didn’t think anything was amiss when he was never asked to sign any paperwork. He said he only discussed with dealer representatives the total amount of the loan and what the monthly payments would be, which he said he could afford with his wife.

“I thought it was a lot, but I was so into getting a new car that I didn’t think about nothing,” he said.

Ms. Arroyo said she complained several times to the dealership, which she said failed to resolve the issue.

The auto-loan industry has largely relied on stated, rather than verified, incomes when making underwriting decisions for borrowers with good credit, because the loans are relatively small compared with mortgages.

Four lenders, including Ford Motor Co.’s financing arm, declined to fund Ms. Arroyo’s loan for the Explorer, according to documents reviewed by the Journal.

Chase Auto Finance Corp. ran the application through automatic software and approved the loan with no manual credit review, according to another document reviewed by the Journal. The application listed Ms. Arroyo’s income as $90,000 a year, her occupation as “manager” and her employer name as “retired.”

The Arroyos said they didn’t provide those answers to the dealer representative. In fact, Ms. Arroyo said she told a dealer representative that she received federal housing assistance. Mr. Arroyo said he told the representative that he and his wife had a combined take-home pay of about $1,900 every two weeks.

Mr. Tayeh said the dealership submitted information they were given to Chase Auto.

The $50,989 loan included a $4,000 “service-contract” fee and a sale price of $44,000 before taxes. The lawsuit accuses the dealership of charging $7,000 to $10,000 more for the Explorer than its fair market value. The vehicle retails for about $34,000, according to the lawsuit. Mr. Tayeh said the dealer did nothing wrong.

Ms. Arroyo was charged an interest rate of 5.34%, according to her lawyer at the New Economy Project, an advocacy group in New York that helped Ms. Arroyo file suit.

J.P. Morgan is the fifth-largest retail auto lender, servicing about 14,500 dealers. It held more than $60 billion in auto loans at the end of the first quarter, up 6% from a year earlier.

The CFPB has received a number of complaints over vehicle loans, with borrowers filing more than 1,200 complaints through April. The watchdog received around 3,100 similar complaints last year and 2,100 in 2013, according to data published on its website.

Agency officials have said they are looking broadly at several issues in auto lending, including discretionary pricing that lenders give to auto dealerships, which officials believe elevates the risk that borrowers of different races get charged uneven rates for similar credit scores.

Recent enforcement actions by U.S. authorities related to auto lending have largely focused on allegations of discrimination in how the loans were granted.

The Justice Department and the CFPB in December 2013 ordered Ally Financial to pay $98 million, including $80 million as compensation to victims, to resolve allegations the lender charged higher interest rates to minority borrowers than to white borrowers with similar credit scores. Ally neither admitted nor denied the allegations under the settlement.