Chapter 26 — Quiz: Subprime and Special Finance

Answers and explanations are hidden in <details> blocks. Scoring guide at the end. No peeking until you've committed to an answer.

Multiple Choice (choose the best answer)

1. The credit-score band this book uses for subprime is roughly: A) 660–779 B) 620–659 C) 580–619 D) below 500

Answer**C) 580–619.** Below ~580 is *deep subprime*; 620–659 is *near-prime* (tiers are illustrative and vary by lender — see Ch 22 §22.3).

2. A stip (stipulation) is best described as: A) the dealer's markup on the rate B) a document or condition the lender requires before it will fund the loan C) the down payment D) the gap between buy rate and sell rate

Answer**B.** Common stips include proof of income, proof of residence, references, proof of insurance, and verification calls. (A/D describe reserve; C is the down payment.)

3. PTI is calculated as: A) amount financed ÷ vehicle value B) monthly payment ÷ gross monthly income C) down payment ÷ selling price D) total interest ÷ amount financed

Answer**B.** Payment-to-income = monthly payment ÷ gross monthly income, expressed as a percent; subprime lenders commonly cap it around 15–20%.

4. LTV protects primarily against: A) the customer paying too little interest B) lending more than the collateral (the car) is worth C) the salesperson earning too much reserve D) the customer shopping other lenders

Answer**B.** Loan-to-value = amount financed ÷ vehicle book value; the cap (often ~110–130%) keeps the lender — and the customer — from being underwater beyond a safe margin.

5. The most powerful single lever for making a subprime deal fundable and affordable is usually: A) raising the interest rate B) the down payment C) adding more products D) lengthening the term as far as possible

Answer**B) down payment.** Every dollar down lowers the amount financed → lowers the payment (PTI) *and* the LTV *and* shows the lender skin in the game. (A raises the payment; C and D harm the customer.)

6. A subprime deal comes back "declined — payment exceeds PTI." Which change would not help fit the cap? A) more money down B) a longer term C) a cheaper vehicle D) a higher interest rate

Answer**D.** A higher rate *increases* the payment, making PTI worse. The other three lower the payment.

7. The biggest single factor in a customer's credit score is: A) credit mix B) length of history C) payment history D) number of inquiries

Answer**C) payment history.** That's exactly why a string of on-time auto payments is such a strong credit-repair tool.

8. "Power booking" a vehicle means: A) financing it over the longest possible term B) reporting the car as having options/value it doesn't have, to inflate the loanable amount C) booking the appointment online D) buying down the rate with the manufacturer

Answer**B.** It's fraud against the lender (inflating book value to beat the LTV cap) and it inflates the customer's loan. Refuse it.

9. A chargeback in F&I means: A) the customer disputes a charge on their card B) the lender claws back the dealer's reserve/product income when a loan goes bad (often defaults early) C) the dealer refunds the down payment D) the customer returns the car within 3 days

Answer**B.** Early defaults trigger chargebacks — which is exactly why the predatory big-payment deal often earns the dealer *less* than it looks once the loan blows up.

10. "The lender approved the bigger payment, so it's fine to sell it to them." This reasoning is wrong because: A) lenders never approve big payments B) the approval means the lender priced in the customer's possible default, not that the customer can comfortably afford it C) bigger payments always charge back D) the salesperson can't see the approval

Answer**B.** "Approved" is permission, not absolution. The lender priced the tier's default risk; *you* chose the structure that produced the payment.

11. In Devon's canonical ethical deal, the structure is: A) $18,995 SUV, $500 down, 21.9%, 72 mo B) $13,995 sedan, $2,500 down, 18.9%, 60 mo, ~$345/mo C) $13,995 sedan, $0 down, 9.9%, 48 mo D) $25,000 truck, $5,000 down, 6.9%, 84 mo

Answer**B.** $13,995 sedan (books ~$11,500), $2,500 down, ~$13,335 financed, 18.9% (17.9% buy + 1-pt reserve), 60 months, **~$345/mo**, PTI 13.3%, LTV 116%. (A is the *predatory* contrast.)

12. The "genuine service" of an ethical subprime loan is best summarized as: A) getting the customer the most car possible B) an affordable on-time payment that rebuilds credit toward a refinance C) the lowest possible monthly payment regardless of term D) zero down payment

Answer**B.** The on-time payment is the product; ~12–18 months of it can move the customer to near-prime and a refinance (Devon: ~$345 → ~$293).

True / False (one-line justification each)

13. A longer term always saves the customer money. T / F

Answer**False.** It lowers the *payment* but raises *total interest* and keeps the customer upside down longer — a real cost, especially at subprime rates.

14. Helping a customer "round up" their stated income to fund a deal is acceptable if the payment seems manageable. T / F

Answer**False.** It's loan application **fraud** — a crime for the salesperson and customer — and it sets the customer up to fail. Everything on the application must be true and provable.

15. A down payment requirement on a subprime deal is just a sales tactic to grab more cash. T / F

Answer**False.** It's structural: it lowers the financed amount, the payment, and the LTV, and it's frequently a literal condition of the lender's approval. It protects the customer too.

16. GAP insurance is more important for a high-LTV subprime customer than for a customer with lots of equity. T / F

Answer**True.** The deeper underwater the loan, the bigger the gap between payoff and the car's value if it's totaled — which is exactly the gap GAP covers. (The abuse is *over-pricing* it, not selling it — Ch 24.)

17. Subprime customers are charged high rates mainly because the dealer marks them up aggressively. T / F

Answer**False.** Most of a subprime rate is the *buy rate* — the lender pricing real, higher tier-wide default risk. The dealer's reserve is a small (and often tightly capped) slice on top.

18. A "yo-yo" / spot-delivery abuse is sending the customer home in the car, then calling later to force a re-sign at worse terms. T / F

Answer**True.** It exploits the customer's attachment to the car. The legitimate version of spot delivery is covered in Ch 25; the abuse is a classic subprime trap.

Short Answer

19. List the four structuring levers in a subprime deal and the goal of each.

Answer**Vehicle** (cheapest reliable car that solves the problem, within lender caps); **down payment** (fit LTV with room, lower the payment); **term** (shortest the customer can carry; plan the refinance); **lender call** (advocate the *right* deal as a good risk, never jam the biggest deal).

20. Explain, in terms a scared customer would understand, how an affordable car loan can improve their credit.

AnswerThe biggest part of a credit score is whether you pay on time. A car loan reports to the credit bureaus every month, so each on-time payment is a positive mark. After about a year of on-time payments, your score typically climbs — often enough to qualify for a lower rate, at which point you can *refinance* the same car at a cheaper payment. The loan you can afford becomes the loan that fixes your credit.

21. Name three predatory red flags a professional refuses, and one sentence on why each harms the customer.

AnswerAny three: **payment they can't carry** (one bad week from default/repo); **stacked negative equity** (buries them deeper each car, a debt spiral); **packed/abusive add-ons** (pays a fortune for products they didn't choose or understand); **power-booking** (fraud that inflates their loan); **yo-yo/spot-delivery abuse** (forced into worse terms after attaching to the car); **bait-and-switch** (lured by a number that wasn't real).

Applied Scenario

22. A customer grosses $3,000/month.** A subprime lender caps **PTI at 15%** and **LTV at 120%.** You're looking at a sedan priced **$14,200 that books at $11,800**; tax (6%) + fees ($1,000) apply; sell rate 18.9%, term 60 months. (a) What's the max payment under the PTI cap? (b) With $2,800 down**, what's the amount financed, the payment, the PTI, and the LTV? (c) Does it fit both caps? If not, name one fix.

Answer (a) Max payment = $3,000 × 0.15 = **$450.** (b) Tax = $852; total = $14,200 + $852 + $1,000 = $16,052; minus $2,800 = **$13,252 financed.** At 18.9%/60 mo (monthly rate 0.01575): payment ≈ **$343.** PTI = $343 ÷ $3,000 = **11.4%** ✅. LTV = $13,252 ÷ $11,800 = **112%** ✅. (c) **Fits both caps with room.** (If it hadn't — say LTV over 120% — the cleanest fix is more money down or a cheaper car; never raise the rate.)

23. A finance manager tells you a 580 customer "won't notice" if you add a $2,500 service contract (dealer cost ~$700) and mark the rate to the lender's max. The payment still "approves." What do you do, and what would the consequences be of going along?

Answer**Refuse / escalate.** This is packing plus maximum-markup-on-the-vulnerable — the disparate-impact pattern regulators built rules around (ECOA, Ch 25). Going along risks: a customer who can't sustain the inflated payment → early default → **chargeback** (clawing back the reserve and product profit) → **repo** → a one-star review and possible AG/CFPB complaint → and your own conscience and job. The honest version: offer the service contract transparently at a fair price *if Devon wants it and it fits the affordable payment*, and use the store's consistent, disclosed markup policy.

Scoring Guide

  • 21–23 correct (90%+): Mastery. You can structure and defend a subprime deal — and refuse a bad one. Proceed.
  • 18–20 (78–87%): Solid. Re-read §26.3 (caps/stips) and §26.7 (the ethical line) and you're ready.
  • 15–17 (65–74%): Shaky on the math or the line. Re-work §26.6 (Devon's deal) by hand and redo Part B of the exercises.
  • Below 15 (<65%): Re-read the chapter, especially the PTI/LTV worked examples and the two-Devons table (§26.8), before moving to Part V.

70%+ (≈16/23) = ready to proceed to Chapter 27.