Earlier this year, Uber (UBER) Technologies terminated its relationship with Santander Bank, which provided financing for prospective “driver-partners” who needed a vehicle. The program had come under criticism for making expensive subprime loans and illegally repossessing cars financed for U.S. Armed Forces veterans.
Uber has apparently made a lateral move by partnering with Westlake Financial, a full-spectrum lender known for its expensive subprime financing programs. It also has a subsidiary, Wilshire Consumer Credit, with the dubious reputation of providing predatory auto title loans.
For a company so obsessed with PR, Uber is doing a poor job of vetting its business partners.
Indeed, Uber’s new partner just landed another PR problem, as the Consumer Financial Protection Bureau slapped it with $44 million in fines and restitution for “deceiving consumers by calling under false pretenses, and using phony caller ID information, falsely threatening to refer borrowers for investigation or criminal prosecution, and illegally disclosing information about debts to borrowers’ employers, friends, and family.”
So why is Uber stooping so low? Uber’s own study, delivered earlier this year, revealed a 45% attrition rate among UberX drivers active for 12 months – and an extrapolated rate that suggests a 60% attrition rate after 16 months.
Because Uber is having trouble retaining drivers, it is forced to recruit from the bottom of the socioeconomic stratum – those most in need of extra income, and most likely to be abused by high-interest auto financing – Westlake’s stock-in-trade.
Uber Income Equal to Taxi’s
Charles Rathbone, a San Francisco-based taxi driver with 40 years experience, who also manages a 200-car taxi fleet, says that Uber drivers are “financially naïve.” Based on gross revenue numbers in Uber’s study, and expense data from the white paper “Towards a Cost Estimate for a NYC UberX Driver”, it appears Rathbone is correct. UberX drivers earn about the same as NYC cab drivers – about $15 per hour. “The economics are terrible,” Rathbone says.
This financial naiveté correlates with lower credit scores, according to CreditRepair.com.
Lower credit scores yield higher auto financing rates. That’s good news for Westlake. It can siphon off interest payments as high as 24.99% in most states.
As if the low pay weren’t bad enough, subprime financing dents net income even more. At 24.99% APR, the monthly payment on a 3-year lease of a $22,000 vehicle would be $875 per month. An APR of 9.99% would lower the car payment to $710 per month.
If net income is that low, how could drivers even maintain their lease payments? They probably couldn’t, which is why Uber’s “Xchange Leasing” program allegedly permits drivers to return a car after 30 days, with only a $250 disposition fee.
Why would Uber bother to recruit from this demographic, partner with a subprime financier, and provide a lease escape route, likely knowing that subprime drivers are likely to return their cars? Perhaps it is to keep up appearances that people are clamoring to sign up, thereby bolstering the company’s unicorn valuation in the private markets, and winning the PR war against taxis.
Yet this strategy appears to just be a band-aid for the high attrition rate. That rate, and Uber’s strategy, provide further explanation for my story published in the Observer in September. I reported that, of 20,448 registered Uber vehicles, only 3,227 were active at any given hour during the summer. The inference is that not only has demand for Uber possibly reached its peak, but that the number of active drivers is far less than the number registered, due to high attrition.
Other Uber obstacles
Additionally, there are mounting obstacles for both Uber and prospective partners when buying or leasing a car. A spokesman for the Limousine, Bus, Taxi Operators of Upstate New York (LBTOUNY) told the Observer that banks, leasing companies, and dealers are operating in a grey zone when it comes to rideshare.
Auto buyers and lessors consummate transactions in their own name, and dealers then send these contracts to banks that do not traditionally handle FHV loans. Most insurance carriers will void personal liability policies if they discover a car was used for rideshare. Thus, if a car is damaged and the insurer declines coverage, and the rideshare company’s limited policy doesn’t fully cover the damage, the buyer could walk away from the vehicle. Rather than be left holding the bag, the bank will charge the loan back to the dealer, claiming the contract was fraudulent – because the borrower did not say they were using the car for rideshare.
Banks, leasing companies and dealers are raising objections – so much so that the Missouri legislature now requires drivers to get retroactive permission from the lienholder to use the car for rideshare.
It’s becoming clear that the days of the Wild West for Uber have come to a close, as regulatory challenges mount, drivers learn that rideshare pay is for the birds, and NYC appears to have reached equilibrium. The question that remains is how much longer Uber can siphon the private markets for additional capital before the music stops.
Lawrence Meyers is a financial and policy analyst. He can be contacted at PDLCapital66@. He currently holds no position in any of the securities discussed here.