Constance is a borrower on the lot I own outside Hagerstown, Maryland. She’s 34, a certified nursing assistant, and her 2014 Civic needs a transmission she cannot pay for. She’s sitting in the chair across from a desk where a man I’ve never met is reading from a script I’ve never read, which was written for the purpose of not looking at her. The down is $1,800. The car is $11,200. The term is 60 months. The total she will pay is $19,400. The GPS is already installed. The kill-switch is on. She will sign. She will drive away. I will be paid first. The transmission her Civic actually needed was $2,300. I sold her a $3,400 Civic for $19,400, and the difference is mine.
You read the column at Fox News this week by Les Rubin, the founder of Main Street Economics. (Read it here.) Mr. Rubin has asked you to picture a house on fire with your children inside, and to act as if the house were yours, and to demand that the grown-ups in Washington stop spending more than the country takes in. He’s right about the number — $40 trillion, $117,000 for every man, woman, and child in the country, the trust funds draining, the interest alone above $1 trillion a year. He’s asking the country to be a kinder creditor. I’m asking you to consider the country’s creditor’s creditor. Me.
Let me put the numbers where you can see them.
I own 11 buy-here-pay-here lots across Pennsylvania, Maryland, and West Virginia. The Hagerstown one is 60 miles outside the District. The strip mall sits between a check casher and a Catholic Charities thrift store. The fluorescent is on from 9 to 7. The lot is 2 acres of asphalt. The 90 cars are mostly 2008 to 2013, mostly Civic and Corolla, mostly with 130,000 to 180,000 miles, mostly bought at Manheim auction by a man named Ozzie who’s paid a $200 spiff for every car he puts under the pole. Ozzie is not unkind. Ozzie is trained.
Watch what happens to Constance.
She’s approved in 14 minutes. The script the F&I manager reads her is one of 11 I rotate. The manager’s bonus is the F&I product attach rate, which is the percent of borrowers who leave the lot that night with the etched-VIN package, the GAP waiver, the prepaid maintenance, the key-fob insurance, and the credit-rebuild product. The etched VIN is $499. The GAP is $895. The maintenance is $1,295. The key-fob is $399. The credit-rebuild is $1,195. The five together cost me $126. Constance will pay $4,283 for them. The total she’s financing tonight is $15,683. Over 72 months at 29.99%, her payment is $472 a month. Her take-home is $1,840.
Read the next sentence twice. The number does not fit in her life. The number fits in mine.
The default is the design. Constance will default in 9.2 months. The 9.2 is the same number Ozzie’s cousin got on a 60-month note at the lot in Martinsburg, and the same number the Hagerstown F&I manager wrote down when Mr. Lin asked him last year, and the same number the subprime auto ABS prospectus for the 2024-A pool puts on the cover, and the same number the rating agencies put in the tranche model. The 9.2 is not a misfortune. The 9.2 is the loan.
The kill-switch activates on day 91 of delinquency. The repo driver is in the lot within 36 hours. The repo fee is $180. The auction fee is $325. The Civic is sold at Manheim for $3,100. The deficiency balance on Constance’s note is $14,300. I sue. I win. I garnish. I keep.
Here is the table I keep.
| Item | Cost to me |
|---|---|
| 2011 Civic, Manheim acquisition | $3,400 |
| Reconditioning, lot | $480 |
| GPS unit + kill-switch, installed | $84 |
| F&I products, 5 items, total cost | $126 |
| Manager, 4 hours, F&I commission | $312 |
| Script, training, license fee | $9 |
| Repo, day 91 | $180 |
| Auction, Manheim | $325 |
| Lawsuit, default judgment | $214 |
| Garnishment, monthly | $14 |
| Total cost of one contract, default path | $5,144 |
| Sale price, 29.99% × 72 months | $33,984 |
| Recovered at auction | $3,100 |
| Deficiency collected over 38 months | $13,488 |
| Total recapture, default path | $52,572 |
The margin on a defaulting contract is $52,572 against $5,144 spent. The margin on a paying contract is $28,840 against $5,030 spent. The paying contract is the loss leader. The default is the product. I’ve been selling Constance the default since she walked onto the lot.
Widen the frame with me.
Mr. Rubin wants you to imagine the fire and the children and to act. He’s right about the fire. He’s wrong about who set it. The $40 trillion Mr. Rubin is asking you to put out is the same fire I’m warming my hands on. The country went subprime in 2008 when the lot the credit unions used to own went broke, and the hedge funds bought the paper, and the gap between what a subprime borrower should pay for a 2011 Civic and what she’s asked to pay became the salary of a man like me. The $40 trillion is the public number. The 29.99% is the private number the public one funds. The country is a borrower. I’m the borrower’s lender. Mr. Rubin wants the country rescued. I want Constance’s note.
I’m not new. I’m the oldest arrangement there is, wearing this decade’s vocabulary. I’m Mr. Hammond’s sill, and Constance is Mr. Hammond’s mudsill, and Mr. Rubin’s $40 trillion is Mr. Hammond’s sill, also, just at a different altitude. Mr. Hammond priced a different kind of body in a different kind of argument in 1858. The arithmetic is the arithmetic. The vocabulary changed. The number did not.
I’ve been reading Matthew 18 to my students at Warden. I read it again last week.
Therefore is the kingdom of heaven likened unto a certain king, which would take account of his servants. And when he had begun to reckon, one was brought unto him, which owed him ten thousand talents. But forasmuch as he had not to pay, his lord commanded him to be sold, and his wife, and children, and all that he had, and payment to be made. The servant therefore fell down, and besought him, saying, Lord, have patience with me, and I will pay thee all. Then the lord of that servant was moved with compassion, and loosed him, and forgave him the debt. But the same servant went out, and found one of his fellowservants, which owed him an hundred pence: and he laid hands on him, and took him by the throat, saying, Pay me that thou owest. Then his fellowservant fell down at his feet, and besought him, saying, Have patience with me, and I will pay thee all. And he would not: but went and cast him into prison, till he should pay the debt. Then his lord, after that he had called him, said unto him, O thou wicked servant, I forgave thee all that debt, because thou desiredst me: shouldest not thou also have had compassion on thy fellowservant, even as I had pity on thee? And his lord was wroth, and delivered him to the tormentors, till he should pay all that was due unto him. So likewise shall my heavenly Father do also unto you, if ye from your hearts forgive not every one his brother their trespasses.
The 10,000 talents is the country. The country forgave me. The country forgave me the bankruptcy code that lets me walk away from the partner lot the year it goes broke. The country forgave me the federal credit union charter I’m not required to apply for. The country forgave me the tax abatement the county gave me in 2019 to put a green roof on a building I haven’t put a green roof on. The country forgave me the CFPB consent order I settled at $0.43 on the dollar. The country forgave me the depreciation schedule that lets me write the Civic off over 5 years even though the note is 6. The 10,000 talents is all of this, and the country is the king in the parable, and the country forgave it all.
Constance owes me 100 pence. The 100 pence is $19,400. I will not forgive her. The kill-switch will activate on day 91. I’ll repo the Civic. I’ll sue her in district court. I’ll garnish her wages. I’ll keep $52,572 against $5,144 I spent. The parable is clear about the rest of the story. I am the rest of the story. The country Mr. Rubin is trying to save is the king in the parable. The king’s wroth is the only thing in the parable I haven’t priced.
I’m not unusual. I’m a curriculum.
For 30 years I’ve been teaching a course at Warden I call Pricing the Borrower. The textbook is mine. The case studies are mine. The final exam is a note originated at a lot I’ve never visited, in a state I’ve never traveled to, by a graduate of mine who does not remember my name. The graduate who got the highest mark in the class of 2014 runs the F&I desk at a chain of 240 stores in the Southeast. The graduate who got the second-highest mark runs the loss-mitigation desk at one of the four big servicers. The graduate who got the third-highest mark is the head of structured products at the firm that securitizes the loans I make. The graduate who got the lowest mark in the class of 2014 became a regulator. She’s now the deputy director of the bureau that’s supposed to police me. She graduated from my course. She’s unusually sympathetic. She doesn’t know the math.
You’re sitting in a building one of my graduates priced. I promise you this. Your car, your credit card, your mortgage, your student loan, your medical debt, your paycheck advance, the rent on the apartment you slept in last night — one of them was priced by a graduate of mine, and the graduate of mine was a better student than I was when I was her age, and the principal she learned was the principal I taught. The curriculum is not a man. The curriculum is the way a man who’s owed a debt is taught to collect it.
Mr. Rubin’s appealing to the country to be a kinder creditor. I’m appealing to the country to be a slower debtor. The 9.2 months is the only metric I’ve ever needed. The grace of God and the 29.99% are not in tension. The grace of God is the 72-month term; without it, the kill-switch would activate too soon for the deficiency to compound.
I do not look up from the binder. The man I’ve never met at the desk I’ve never sat at is closing Constance’s file at 6:43 tonight. The Civic is in the lot. The GPS is on. The fluorescent is on. The number holds. The lot is open until 7.
Sterling A. Varice holds the Hayek-Friedman Chair and serves as Dean of Instruction at Warden University’s College of Business and Economics in Richmond, Virginia. He is the author of three textbooks: Divine Mandates for Labor Utilization, Social Obligations for Profit Maximization, and Calibrated Deprivation: A Manager’s Guide to Employee Motivation.