Does One Size Fit All?

What credit unions can learn from a Canadian bank’s 25% auto loan interest rate.

According to aCBCNews article published Monday, TD Bank misled a British Columbia couple into a vehicle loan with an interest rate of 25%, which left them paying more in interest than the book value of the car.

We’re paying $21,000 for the loan then $23,000 in interest, says Angie Hauser who, along with her husband Enzo Gamarra, is speaking out against the institution.

The Canadian couple declared bankruptcy in 2010. In 2011, the couple needed a new vehicle and were able to find a dealer willing to finance vehicles for people with bad credit. According the couple, the dealership sold them a 2010 Dodge Avenger on a seven-year term at 25% interest with the promise that if they made their payments in full and on time for one year, the dealer would refinance at a lower rate.

When the couple returned to the dealership a year later, the dealer refused to refinance because of their history of bankruptcy.

How can you deny me refinancing when I’ve been in bankruptcy when you gave me a loan in bankruptcy? Hauser asks. It doesn’t make sense.

The couple tried other banks, at one point asking for a trade-in at another dealership in order to get new financing. They did find an interest rate of 15%; however, the temrs were shorter and the couple could not afford the higher monthly payments. So they were stuck with 25%.

We are talking about a big Canadian bank, Gamarra says. For them to do that to us … that just makes me angry.

Legally, TD Bank appears to be within its rights. The rate might be steep, but there is no evidence the couple was coerced into the loan. However, the couple is claiming the bank intentionally misled them. Lying to a borrower is inexcusable, and this is a reminder that borrowers double-check that the key tenant of their loan agreement is actually inthe loan agreement, not just a verbal agreement.

The lesson here for credit unions is simple: It’s not that the best indicator of future behavior is past behavior; it’s not that everyone deserves a second chance. It’s not a stale platitude about what is morally right versus what is morally wrong. It’s that people don’t exist in a vacuum.

Any number of factors affects our financial lives, and it’s much easier to flat out deny a request from a borrower with a negative history than it is to work to find a solution. In this case, Hauser and Gamarra are both employed. They have a daughter and a mortgage. They need a car to drive to work. They filed for bankruptcy in 2010, which rightfully raises red flags, but shouldn’t a 25% interest rate over a seven-year term raise those same red flags?

Unfortunately, the couple felt they were out of options. Would your credit union have worked with these high-risk borrowers? What would you have done? Are your decisioning parameters flexible enough to take into account a potential borrower’s finances holistically? After all, one size does not fit all.

January 9, 2014

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