Preventing a Boom from Turning Bust: Regulators Should Turn Their Attention to Starter Interrupt Devices Before the Subprime Auto Lending Bubble Bursts

• Author: Kwesi D. Atta-Krah
• Position: J.D. Candidate, The University of Iowa College of Law, 2016; M.B.A., Drake University, 2007; B.A., Drake University, 2004
• Pages: 1187-1222

1187

Preventing a Boom from Turning Bust:

Regulators Should Turn Their Attention

to Starter Interrupt Devices Before the

Subprime Auto Lending Bubble Bursts

Kwesi D. Atta-Krah

ABSTRACT: In recent years, the subprime auto lending industry has

increasingly used starter interrupt devices (“SIDs”) as a condition on loans.

An SID is a technological device installed in a car that allows an auto lender

to remotely disable a mortgaged car’s ignition system and, if equipped with a

global positioning system, communicate the location of the car to the lender

for easy repossession. Notably, however, the SID is not an indicator of a

subprime borrower’s financial ability to make loan payments. The industry’s

reliance on SIDs in lieu of traditional creditworthiness metrics has contributed

to an increase in borrower delinquencies, and because auto lenders package

and sell these risky loans to secondary market investors, the risk of default

extends to other areas of the economy as well. Even though the subprime auto

lending industry constitutes only a fraction of the total economy in terms of

volume of credit extended, the ripple effects of a market failure could have

serious repercussions for the macro economy. This Note argues that subprime

auto lenders should refrain from using SIDs in their credit underwriting

process and as a condition for extending credit to subprime borrowers.

Further, federal and state regulators should ensure that subprime auto lenders

keep their credit and underwriting functions separate from their loan

servicing functions to protect individual borrowers, the auto lending

industry, and the macro economy from the adverse effects of SID-infected auto

loans.

 J.D. Candidate, The University of Iowa College of Law, 2016; M.B.A., Drake University,

2007; B.A., Drake University, 2004. Thank you to my family, especially my wife Amy Gandhi for

her continued support. Also, thank you to the Iowa Law Review Volume 100 and 101 editors and

student writers for their hard work and efforts on this Note.

1188 IOWA LAW REVIEW [Vol. 101:1187

I. INTRODUCTION ........................................................................... 1189

II. STARTER INTERRUPT DEVICES AND THE SUBPRIME AUTO MARKET: A

REMNANT OF THE MORTGAGE CRISIS ......................................... 1191

A. STARTER INTERRUPT DEVICES AND THE SUBPRIME AUTO LENDING

INDUSTRY ............................................................................. 1191

1. How Starter Interrupt Devices Work: Power to Auto

Loan Lenders .............................................................. 1191

2. Auto Dealers and Financing Choices for the

Consumer .................................................................... 1192

3. Subprime Auto Loan Boom: Then and Now ............ 1195

B. MORTGAGE CRISIS: FAILED CREDIT RISK MANAGEMENT

PRACTICES ............................................................................ 1197

1. Careless Subprime Lending—a Major Cause of the

Crisis ............................................................................. 1197

2. Effects of the Mortgage Crisis .................................... 1197

C. THE CURRENT LEGAL LANDSCAPE: SIDS UNDER FEDERAL

REGULATIONS AND STATE LAW .............................................. 1199

1. Federal Regulation of Subprime Auto Lending ....... 1199

2. Legality of SIDs Under State Law ............................... 1201

i. Category One: States with Informal Advice ............... 1204

ii. Category Two: States Statutorily Approving the Use of

SIDs ........................................................................ 1205

iii. Category Three: States That Proposed but Did Not Pass

Laws Regarding SIDs .............................................. 1207

iv. Assessing the State of the Law ................................... 1207

III. SIDS FUELING A POTENTIAL SUBPRIME AUTO “BUBBLE” ........... 1208

A. THE VULNERABILITY OF THE SUBPRIME AUTO BORROWER....... 1208

B. A PICTURE OF HOW SIDS ARE FUELING A SUBPRIME AUTO

INDUSTRY BUBBLE ................................................................. 1209

C. SUBPRIME AUTO LOAN INVESTMENTS AND THE ECONOMY ....... 1212

D. EVIDENCE THAT SUBPRIME AUTO LENDING PROBLEMS ARE

“HEATING UP” ...................................................................... 1214

E. LACK OF STEADY SID REGULATION IS HURTING CONSUMERS .. 1216

IV. CFPB SHOULD PROVIDE TARGETED SID SUPERVISION OF SUBPRIME

AUTO LENDERS AND STATES SHOULD PASS APPROPRIATE AND

TARGETED REGULATIONS ON SIDS ............................................. 1217

A. SUBPRIME AUTO LENDERS SHOULD KEEP THE SID OUT OF THEIR

CREDIT DECISION MAKING PROCESS ....................................... 1217

2016] PREVENTING A BOOM FROM TURNING BUST 1189

B. THE CFPB SHOULD PERFORM A MORE TARGETED EXAMINATION OF

SIDS FOR NONBANK “PARTICIPANTS” THAT FALL UNDER ITS

SUPERVISION ......................................................................... 1219

C. STATES SHOULD PASS APPROPRIATE AND TARGETED REGULATION

ON SIDS ................................................................................ 1221

V. CONCLUSION .............................................................................. 1222

I. INTRODUCTION

A boom in the subprime auto lending industry is making headlines. Auto

lenders issued over $145 billion in subprime auto loans in the first quarter of

20141 compared with only about $120 billion in all of 2013.2 Subprime auto

lenders are using technology to fuel this lending boom. Specifically, they

require subprime loan applicants to install starter interrupt devices (“SIDs”)

in their cars as a condition of getting a car loan.3 SIDs enable the auto lender

to remotely disable the ignition system of a borrower’s car if the borrower

defaults. When equipped with a global positioning system (“GPS”), the SID

also communicates the location of the car to the lender, facilitating

repossession. Recent news reports provide evidence that the unregulated use

of SIDs negatively affects subprime borrowers4 and their families. For

example, one subprime auto lender remotely shut off a woman’s car while she

was driving her ten-year-old asthmatic daughter to the emergency room.5

1. Michael Corkery & Jessica Silver-Greenberg, Miss a Payment? Good Luck Moving Th at Car,

N.Y. TIMES: DEALBOOK (Sept. 24, 2014, 9:33 PM), http://dealbook.nytimes.com/2014/09/24/

miss-a-payment-good-luck-moving-that-car/?ref=technology.

2. Matt Robinson et al., Auto Loans: A Subprime Market Grows in the Shadows, BLOOMBERG

BUS. (Oct. 2, 2014), http://www.businessweek.com/articles/2014-10-02/auto-loans-a-subprime-

market-grows-in-the-shadows.

3. Sometimes also referred to as “Payment Assurance devices.” Jeff Karg, Choosing the Right

GPS & Payment Assurance Device Provider, AUTOMOTIVE DIG., http://automotivedigest.com/

2012/10/choosing-the-right-gps-payment-assurance-device-provider (last visited Jan. 13, 2016).

4. “A subprime borrower is an individual with a less-than-perfect credit rating.” Glossary:

Subprime Borrower, LENDINGTREE, https://www.lendingtree.com/glossary/what-is-subprime-borrower

(last visited Jan. 13, 2016). Characteristics of a subprime borrower include an individual with:

(1) “[a] FICO score below 660;” (2) “[t]wo or more 30-day delinquencies in the last 12 months;”

(3) “[a] foreclosure in the last 24 months;” (4) “[a] bankruptcy in the last 60 months;”

(5) “[d]ebt-to-income ratio of 50 percent or more;” and (6) “[t]rouble paying for month-to-

month living expenses.” Id. FICO sta nds for Fair Is aac Corporation and is a company that creates

credit scores. FICO “use[s] information provided by one of the th ree major credit reporting

agencies—Equifax, Experian or TransUnion” and “uses it to create scores that help lenders

predict behavior, such as how likely someone is to pay their bills on time (or not), or whether

they are able to handle a larger credit line.” Gerri Detweiler, What Does FICO Stand For? What Is a

FICO Score?, CREDIT.COM (Sept. 19, 2013), http://www.credit.com/credit-scores/what-does-fico-

stand-for-and-what-is-a-fico-credit-score.

5. See infra notes 180–81 and accompanying text.