It is fraud when an issuer of a loan knowingly puts down false information in order for the loan to be approved. When a securitizer includes large numbers of these loans in securities, as Floyd Norris reports was the case with Citigroup during the housing bubble, this is fraud.
The Obama administration decided not to pursue criminal cases against executives at the major banks who likely committed fraud on a large scale. As a result, most of these bank executives are almost certainly better off as a result of their decision to commit fraud, even though the fraud has been exposed, than if they had obeyed the law.
When crime goes unpunished it naturally leads to more crime. Hence the NYT reported today that subprime auto lenders are doing many of the same scams that subprime mortgage lenders did in the housing bubble days. They are issuing loans, often for more than the value of the car, based on phony income numbers that the lenders themselves wrote in. In a time of generally low interest rates, these loans can be attractive to investors and Wall Street banks are therefore anxious to purchase them and securitize them.
The scale of the subprime auto loan sector is an order of magnitude smaller than the subprime mortgage sector during the bubble days, so it does not pose the same risks to the financial system. (Also, there is not a risk of a downward spiral in car prices as was the case with house prices during the bubble.) However these loans can lead to enormous hardship for the people affected, causing many to be pursued by creditors for years or forced into bankruptcy.
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