20231114

How Wall Street Makes Millions Selling Car Loans Customers Can’t Repay

Packaging loans and reselling them as asset-backed bonds—a process known as securitization—has great appeal on Wall Street. Investment firms such as Capital Group and Bank of New York Mellon Corp. snapped up the securities in Drive 2019-3 because their yields beat Treasuries. Car loans made to people with spotty credit backed more than $37 billion of bonds last year, twice the value of a decade before, according to data compiled by Bloomberg.

If many of these subprime borrowers couldn’t repay, it hardly mattered to investors. Multiple layers of protections all but guaranteed that they’d get back their principal with interest. While customers would often lose their cars to repossession and have their lives upended, Santander stood to earn tens, if not, hundreds of millions of dollars.

As is typical for bonds backed by risky car loans, a Santander offering document suggests it built the security based on the assumption that much of the debt would go bad. The company initially projected that customers would fail to repay 42% of the money they borrowed. Thousands of borrowers would ultimately default. Even some in the industry question whether it makes sense to let so many customers take on more debt than they can afford. “It doesn’t really work for the consumer,” says Daniel Chu, chief executive officer of subprime auto lender Tricolor Holdings. “But it works for everyone else.”

In a country where most people rely on cars to get to work and transport their families, Santander and other lenders say they’re throwing a lifeline to those with poor credit and few other options. “The benefits of automobile ownership are substantial,” Santander Consumer USA says in a statement. “For example, consumers who own a car are more likely to have higher employment income, live in safer neighborhoods, and are more likely to exit income support programs.” For privacy reasons, Santander says it wouldn’t comment on an individual customer loan, while adding it “adheres to all regulatory requirements and industry best practices.”

When customers default, technology makes it far easier to repossess cars than in the days of the grizzled, harried Repo Man, immortalized by the actor Harry Dean Stanton in the 1984 film. GPS tracking and license plate scanners can easily locate a vehicle, which can be resold and provide a constant stream of cash replenishing bondholders’ accounts. “This market is structured to make money even though it may be preying on borrowers,” says Boston College law professor Patricia McCoy, a former US Treasury official who was among the CFPB’s first top staffers.

The couple had long driven cheap, old cars but, in March 2018, James decided to surprise Janice with a two-year-old Toyota Camry that would be more reliable. He borrowed $16,963.18 at a 22.58% interest rate, committing to six years of $435.87 monthly payments. It ended up as loan No. 18148909 in another Santander bond offering, called Drive 2018-2.

EK: Buy a car when you can pay full in cash.

Weight-Loss Drugs Among the Most Sought-After New Corporate Benefits

The craze around pricey weight-loss drugs has many people clamoring for these treatments in company-sponsored health plans.

The Mercer survey was conducted before Eli Lilly & Co. won US clearance this week for Zepbound, a version of its diabetes drug Mounjaro that will be specifically marketed to patients with obesity in coming weeks. Both drugs belong to a class of medicines known as GLP-1 receptor agonists. The group also includes Novo Nordisk A/S’s Wegovy, which is approved for obesity, and Ozempic, a diabetes drug that is often used for weight loss. List prices for the drugs range from $936 per month to nearly $1,350.

Demand for coverage of obesity drugs comes as companies’ benefit packages are evolving. Nearly two-thirds of employers said they were planning to make “enhancements” to their health and wellbeing offerings for next year, according to Mercer. For example, menopause benefits are increasingly common with 15% of employers offering or planning to offer them next year, up from just 4% a year ago.

Employers also are starting to recognize the toll that caring for aging family members and children takes on workers’ finances and wellbeing. More than three-quarters of large companies surveyed by the Employee Benefit Research Institute said interest in elder and child care benefits has increased since the beginning of the pandemic.

Another area of growing interest is help with student debt — 40 million people in the US collectively owe more than $1.6 trillion — now that payments have resumed after a pause during the pandemic. Eighty-six percent of employers are currently offering or planning to offer student loan debt assistance or tuition reimbursement, according to EBRI.

EK: Paying for fitness centers is outdated already. Companies will take care of your obesity.