Chapter 26 — Exercises: Subprime and Special Finance

Work these after reading the chapter. They build from recall to judgment. Most need no answer key here — selected numeric answers are in <details> blocks, and worked solutions live in Appendix I.

Difficulty legend: ⭐ basic · ⭐⭐ applied · ⭐⭐⭐ synthesis/judgment · ⭐⭐⭐⭐ advanced/extension

Part A — Conceptual Understanding ⭐

1. In one sentence each, define: subprime, special finance, stip, PTI, LTV, unwind, chargeback.

2. List the common stipulations a subprime lender requires before funding a loan. For each, say in one phrase why the lender wants it.

3. What credit-score range does this book use for the subprime tier? For deep subprime? (Note these are illustrative, not fixed law.)

4. Name the four structuring levers in a subprime deal. Which one is the most powerful, and why?

5. True or false: a subprime lender's approval of a payment means the customer can comfortably afford it. Explain.

6. What is the single biggest factor in a credit score, and why does that make an auto loan a good credit-repair tool?

7. Why are subprime reserve caps often tighter than prime reserve caps? (Tie it back to the fair-lending discussion in Chapter 22.)

8. Fill in the blank and explain: "In special finance, the real product you're selling isn't the car — it's the ______."

9. What is a lender call ("calling the buyer"), and how do the ethical and predatory versions of it differ?

10. Give the PTI formula and the LTV formula. What does each ratio protect against?

Part B — Applied Analysis ⭐⭐

1. A customer grosses $3,200/month. A lender caps PTI at 16%. What is the maximum monthly payment that fits the cap? Show the calculation.

2. A car books (wholesale) at $14,000.** The subprime lender caps **LTV at 125%.** What is the most the lender will finance? If tax and fees add $1,900 to a selling price of $14,500, how much down payment** is required to fit the LTV cap?

3. Devon's ethical deal finances $13,335 at 18.9% over 60 months ≈ $345/mo. A second customer wants the same car and rate but can only afford a $300 payment. Roughly what would have to change (name two specific levers and the direction)?

4. A subprime deal comes back **"approved with $1,500 cash down."** The customer has only $700. List three legitimate paths forward and one path you must refuse.

5. Take the side-by-side table from §26.8. In plain English, explain to a customer why the predatory deal's **total of payments (~$40,851)** is nearly **double** the ethical deal's (~$20,711), even though both are "just a car payment."

6. A coworker says, "Subprime customers are risky and ungrateful — they default and they're a pain. I avoid them." Give two business reasons (not just moral ones) why a well-structured subprime book can be a strong, durable income source.

7. A customer's application lists income of $2,400/month, but the pay stubs prove only $2,050/month. The finance manager says "just submit the 2,400, the verification probably won't catch it." Identify the violation, the likely outcome, and the correct action.

Part C — Skills & Practice ⭐⭐–⭐⭐⭐

1. Write your word track for the moment a scared, previously-burned customer admits their credit is "around 580." In 4–6 sentences, (a) thank them, (b) tell the truth about what 580 means, and (c) offer a path (the credit-repair/refinance idea) — without overpromising. Then mark which sentence does the trust-building work.

2. Calculate this deal. A customer grosses $2,900/month.** You find a reliable sedan priced **$12,500 that books at $10,800.** Tax (6%) + fees ($1,000) apply. The lender caps PTI 17% and LTV 120%, and the sell rate is 17.9% APR. (a) With $2,000 down**, what's the amount financed? (b) At 60 months, what's the payment? (Use the formula from Chapter 22 §22.5.) (c) What's the PTI? The LTV? Does the deal fit both caps?

3. Role-play this. Partner up. One plays a customer who has fallen in love with a $19,000 SUV that doesn't fit their budget; the other must steer them to a sensible $13,000 sedan without making them feel denied or judged. Then swap. Debrief: what words landed? What felt like a "no"?

4. Write your term-trade-off script. Show a customer the choice between a 60-month and a 72-month term on the same balance, including payment, total interest, and time-to-equity, ending in a recommendation and "your call." Use real numbers (you may reuse Devon's term table).

5. Diagnose what went wrong. A customer bought a used SUV last year: $0 down, max term, two packed products, 21.9% rate, payment at 23% PTI. They missed a payment after a slow paycheck and the car was repossessed. List every structuring decision that contributed and what the ethical alternative would have been for each.

6. Build the "fit the box" worksheet described in the Project Checkpoint: from a customer's gross income and a PTI cap, work backward to a target payment, then a target amount financed, then a vehicle and required down. Test it on a customer of your own invention and confirm it produces a sane, fundable structure.

Part D — Synthesis & Critical Thinking ⭐⭐⭐

1. The chapter claims that in subprime, "the ethical structure and the profitable structure are the same structure." Argue for this using the chargeback/repo economics — then argue the strongest counterpoint a cynic would make, and rebut it.

2. A subprime lender's approval has "priced in" the possibility that the customer defaults. Given that, whose responsibility is it to ensure the payment is genuinely affordable — the lender's or the salesperson's? Defend your answer.

3. Is requiring a down payment ever unfair to a customer who "doesn't have it"? Reconcile "every dollar down protects the customer" with "the customer who most needs a car often has the least cash." What's the professional's responsibility when the two collide?

4. The same skill — the lender call, reading the customer, structuring the deal — can help or exploit depending on intent. Connect this to the Chapter 3 idea that adaptation is service, not seduction. Where exactly is the line in special finance?

5. Some argue subprime auto lending is inherently predatory and shouldn't exist; others argue it's the only way millions of people get to work. Stake out a defensible middle position a professional could actually operate from.

Part M — Mixed / Interleaved Practice ⭐⭐–⭐⭐⭐

These deliberately combine this chapter with earlier ones.

1. (Ch 26 + Ch 22) Devon's sell rate is 18.9% on a 17.9% buy rate. (a) State the reserve in rate terms. (b) Explain, using the broker model, why "the dealer made his rate too high" is the wrong way for a customer to think about a subprime rate that's mostly the buy rate.

2. (Ch 26 + Ch 25) Walk a subprime deal through the deal jacket / compliance lens: which documents are stips vs. disclosures vs. adverse-action paperwork? Where does ECOA bite? Where does FCRA bite?

3. (Ch 26 + Ch 24) A high-LTV subprime customer is exactly the person who most needs GAP — and exactly the person a predator over-charges for it. Explain both halves: why GAP genuinely protects this customer, and how the same product becomes packing.

4. (Ch 26 + Ch 3 + Ch 13) Devon says "I'm just looking" in a fearful voice. Using the Chapter 3 "just looking = defense" idea and the Chapter 13 "objection = request for reassurance" idea, write the next three things you'd say.

5. (Ch 26 + Ch 21) Compare the ethical subprime franchise deal in this chapter with a buy-here-pay-here (BHPH) deal from Chapter 21. For a 580 customer, when might each be the better real-world option? What does each do (or fail to do) for the customer's credit?

6. (Ch 26 + Ch 12) In Chapter 12 you learned transparency closes more. Show how the same transparency principle applies, even more sharply, when the customer is a scared subprime buyer rather than a confident prime negotiator.

Part E — Research & Extension ⭐⭐⭐⭐

1. Look up the CFPB's consumer-facing materials on auto loans and on credit repair. Summarize, in one page a customer could read, what an honest path from subprime to prime actually looks like. (See further-reading.md.)

2. Research how rate-shopping inquiry windows work in the major credit-scoring models (the "treat multiple auto inquiries in a short window as one" rule). Write the exact advice you'd give a subprime customer about shopping their loan without hurting their score.

3. Find your state's rules (or the lack of them) on maximum auto-loan interest rates / usury caps and on spot-delivery / "yo-yo" financing. Summarize what's allowed where you sell, and note that this varies by state and changes over time — cite the primary source.