St. Louis Post-Dispatch, September 22, 2013
Back in the old days, if you couldn’t make your car payment, you had to watch out for the repo man. Now, the repo man is a robot that rides around in a little device under your dashboard. Miss a payment, and the car becomes a hunk of useless metal immobilized by a starter blocking device triggered from cyberspace.
The owner then has a choice — pay up and get use of the car again, or wait until the human repo man eventually rolls up. He’ll be guided right to the spot by a GPS tattletale in the device.
“Automated Collection Technology,” as it’s known in the business, is becoming a common part of the “deep subprime” auto lending market. That’s the market that finances old used cars for people with little income and poor credit. The industry charges high interest — often more than 20 percent. Not surprisingly, such lenders often have trouble collecting.
The devices, which prevent cars from starting, are sparking a challenge from Legal Services of Eastern Missouri. The legal aid nonprofit agency, which serves the poor, contends they’re dangerous — stranding motorists far from home, sometimes at night and in crime-ridden neighborhoods.
“I call it stranding technology,” said Rob Swearingen, the legal services attorney who recently filed a lawsuit against the practice. The devices don’t stop a car while moving. But once the engine is off, they stop it from restarting. “I had a client who was in an intersection with a child,” Swearingen said. The car stalled, and when she tried to restart it, the starter was blocked. “She had to roll the car to the side of the road, get the child out and beg somebody for money to get on a bus.”
The industry says the devices are a public service. By encouraging prompt payment, the devices help consumers rebuild their battered credit scores, the industry contends. By reducing losses for lenders, it allows them to make bigger loans to borrowers so they can buy better cars. The devices can also foil car thieves by guiding police to the stolen car.
Hosea Robinson said the device did him no favors. He was working as a security guard at a housing project in Wellston. “I was a little behind in my payments. They kept calling and I told them I was going to make a payment when I got paid,” Robinson said. Leaving work at night, he found his 1997 Sunfire wouldn’t start. “I called them, and they said that unless I made a payment, they wouldn’t turn it on.” Robinson got his brother out of bed to give him a ride home. When he returned the next day, the car’s windows had been smashed and the car was dented. “There was $400 or $500 damage to the car. It pretty much wound up being junked,” he said.
Auto dealers think the devices ease their biggest headache — people who pay late, or don’t pay at all. About a third of subprime customers default on their loans, said Ken Shilson, founder and president of the National Alliance of Buy-Here-Pay-Here Dealers. As a result, the industry spends a lot on collectors, who call customers when payments are late.
The devices reverse that process. Fearing that their cars won’t start, people who are going to be late call the collectors to beg for extra time to pay. Some of the devices beep at customers just before payments are due, and whistle when they’re a day away from being shut off.
In a survey by the National Alliance, 91 percent of dealers said the devices cut their collection expenses, and 81 percent think the devices reduce the risk of default. “There are two types of operators — those that are using the devices and those that should be using the devices,” Shilson said. His surveys show that 40 to 60 percent of subprime lenders and dealers are using some type of device. Some simply track the car by GPS, but most can both track and disable it. “It’s the number one business model in use in deep subprime,” Shilson said.
Some customers aren’t happy about riding with a repo robot. Rachael Ward, a dental assistant from Fenton, bought her 2003 Mitsubishi Galant in October 2010 at Auto Credit Mart on St. Charles Rock Road. She put $700 down and borrowed $5,382 from Western Funding.
Western Funding is a major subprime lender, financing cars through 3,000 car lots. It charges an average interest rate of 23 percent, according to the company website. The dealer explained the device and that the lender could freeze the starter if she fell behind. “They said, ‘It’s a benefit to you. If it’s ever stolen, we can track it down and shut it off,’” she recalled. Customers usually sign a paper acknowledging the device.
Ward, a married mother of two, didn’t think much about it until one day that winter. “I got into my car to leave for the doctor, and the car wouldn’t start. When I tried, the key it would make this beeping noise,” she said. “I’m freaking out because I have to get the kids from school.” She wasn’t behind on her payment, she said. She called Western Funding, and they gave her control of the car again after a 30-minute wait. It happened again in March 2011, she said. This time it took more than an hour to restore.
By August 2011, however, she says she was two weeks behind on her car payment. She left work in Des Peres and found her starter frozen. “Your payment was due on the first,” said the representative at Western Funding, according to Ward. “You’re late.” At the time, she lived in Bellefontaine Neighbors, about 25 miles away. After some begging, they let her drive home before shutting it off again.
She fell behind again and was shut off again in November, while out shopping with her family. This time they wouldn’t unfreeze the starter until she paid. In December, her car was disabled again while she was at work. “They laughed at me,” she said. “They said the policy had changed. Now instead of 10 days to pay, you have five days. My husband came with the kids and picked me up.” She later wired in the money to the lender.
After all that, she’s frightened by the device. “It’s a hassle, and I’m constantly nervous,” she said. “What will happen if I have the kids with me and it’s the middle of winter?” But it does concentrate her mind on making on-time payments. “I’m a day late and I’m paranoid. It’s a constant worry,” she said.
That’s the value of a cutoff device from the dealer’s perspective — it keeps customers paying on time. Swearingen, the legal services lawyer, says dealers don’t really want to repossess the cars, which tend to be old and high-mileage with little value. They’d rather have the money.
“Of course you cut delinquencies. People are scared out of their wits,” Swearingen said. In a lawsuit filed against Western Funding, Swearingen says the experience left Ward with “anxiety, loss of appetite, chest pains, loss of concentration at her job and in her personal life, crying, depression, fear of using the car, fear of being stranded, embarrassment … fatigue, headaches, personal humiliation, insomnia … nausea, nervousness, panic attack, restlessness and loss of sleep.”
Swearingen hangs his legal hat on an old common law principle that a lender can’t “breach the peace” in a repossession. That means they can’t put a person in harm’s way. To Swearingen, that would mean “turning off a car in a bad neighborhood, or for a single female at night.”
Western Funding didn’t reply to requests for comment. The lending industry takes pains to prevent such events, Shilson said. “They try to shut them off in the middle of the night so to be minimally disruptive.”
Passtime is a Colorado company that is the biggest supplier of starter interrupters. Its CEO, Stan Schwarz, says it provides a remote control that borrowers can use to get a 24-hour reprieve after the starter has been frozen. “We never want anybody to be stranded,” he said.
Swearingen, the poverty lawyer, also suspects that some companies are violating Missouri’s law on repossessions. Lenders must wait 10 days after a payment is due, then send a letter notifying the borrower of the default. They then give the borrower another 20 days to pay before taking action to enforce its contract. Ward said she never got a warning letter.
Companies such as Passtime supply the devices, along with software that lenders use to decide when to cut a customer off. But the actual cutoff decision is made by the lender.
According to the National Alliance survey, 14 percent start GPS tracking or disable immediately when a customer misses a payment, 30 percent have a short grace period, 54 use discretion and 1 percent use the devices only as a threat.
Schwarz says his company’s software is programmed with Missouri’s legal requirements, including the need for a warning letter. It’s not clear if Ward’s car had a Passtime device. Western Funding used to be a customer, but is no longer, Schwarz said. According to Swearingen, Western Funding’s records, which he received in another suit, indicate that it does send warning letters to customers.
The use of starter cutoff devices began in 1999. It was pioneered by former Detroit Lions football player Mel Farr, who owned car dealerships in Detroit. In local TV commercials, he played a “superstar” flying through the air in a red cape, and specialized in lending to people with shaky credit.
Small, cheap GPS devices arrived over the last decade, and manufacturers began combining them with starter disablers. Prices have come down to the $100 to $275 range. Use seems to be growing.
Sales at Passtime have been growing at 20 percent a year for the past three years. Schwarz expects 30 percent growth this year at his privately held company. Use of the devices is creeping up into the “near-prime” market, where lenders have credit scores below 680 but aren’t considered deeply poor credit risks, he says.
Shilson, meanwhile, says subprime lenders are doing a public service — despite their high interest rates — by lending to people who need cars and who other lenders wouldn’t touch. “These are lenders of last resort. They have to protect themselves,” he said.