101 Iowa L. Rev. 1187 (2015)

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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.