I just heard in the news, regarding the car rental scam, that banks gave out car loans to borrowers who have clearly no capacity to pay – either mga “walang trabaho” (unemployed) or “tindera lang” (saleslady). The news inferred that this loose policy caused the scam to proliferate. Because how else could a person, who is not the car owner, mortgage such car?! One girl was approved for a loan to buy seven cars and she didn’t even have a job!
The news then pans out to a drone shot of the what could possibly be more than three dozen cars that were repossessed. These cars would probably have to be sold at a loss by the banks! If they could even be sold at all. The longer these cars sit on the lot, the larger the cost of depreciation would be, thereby reducing the value of these cars.
Banks are duty bound to do proper credit check
Sec. 40 of the General Banking Law requires banks to make sure that a borrower has the capacity to pay a loan, before lending money, to wit:
“ Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.
Toward this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said statements and shall
have the right to demand immediate repayment or liquidation of the obligation.
In formulating rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of microfinancing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral.”
This therefore begs the question: how did a jobless person get approved for a loan to buy SEVEN BRAND NEW CARS? Unfortunately, the reporter didn’t disclose the bank’s name and the girl’s face was heavily blurred for anonymity.
The law imposes strict borrowing requirements for a reason – to ensure the liquidity of banks and hello, safeguard OUR money! If banks keep lending out money to people who can’t and eventually won’t pay, then the bank eventually folds and there goes your money!
Low down-payments compound the problem
Nowadays, many car dealers offer “promos”* that allow people with as little as PhP 5,000.00 (100 USD) to make a down-payment on a car! Financing is usually in-house and carries with it predatory** interest rates. I don’t think banks allow such low down-payments as banks are heavily regulated by the central bank, which requires a minimum collateral (about 25% minimum down-payment I think to cover depreciation cost+the entire car as chattel), dependent on current BSP regulations.
If you can’t afford a large down-payment (at least 20% of the car’s gross selling price), you probably can’t afford the car and the eventual amortization payments. There is more probability that you would default (once an unstable income stream fails such as Uber or Grabcar drivers) and eventually your car would be repossessed (and that’s a whole different form of humiliation).
Subprime car loans worry me because they are unsustainable. The NINJA (see meaning below) borrower eventually defaults and banks are prone to huge losses. Banks should mitigate risk and protect their liquidity not just for their sake but for the sake of the bank depositors.
You all know what caused the subprime mortgage crisis in the US and the subsequent contagion it spread to the other parts of the UK and to the rest of the EU. If not, well it was caused by subprime home mortgage loans, which were tied to credit derivatives (that are traded on a derivative market, just like shares of stocks). Mortgages and their cash flow from interest payments made by borrowers are the underlying assets of the security, which is the credit derivative. The lending bank sells the security to the investment bank for a fee (bank also transfers the risk of nonpayment to the investment bank).
In turn, the investment bank (mis)represents the security as investment grade, to its customers / clients / other traders. The security becomes actively traded on a credit derivative exchange, similar to a stock being sold on a stock market.
The lending bank loses any incentive to do proper credit checks on its borrowers because investment bank is ready to buy its subprime mortgages anyway. So lending bank lends NINJA loans (No Income No Job No asset). Borrowers, having no capacity to pay, eventually fails to pay and the domino starts to fall.
No credit derivative securities market in the Philippines-yet
I’ve previously said that the Philippine securities market is still primitive. We only have a stock and bond market and that’s it! The Securities Regulation Code disallows futures trading and there’s simply no exchange for secondary or derivative securities. Thankfully, this primitiveness sheltered us from the 2007 US recession.
There being no exchange for credit derivatives for which these subprime car loans may be packaged and eventually traded, a Philippine recession is unlikely.
Still, bank runs are my worst nightmare and banks should be careful to mitigate against unnecessary risk.
How do you feel about these low car down-payments?
*Not really a promo because there’s no discount or reduction on the car price!
**per my mom’s experience with in-house financing