Increasing vehicle prices have long spurred car buyers to hunt for affordable monthly payments, but now that ability to repay loans is catching the eye of regulators.
The Massachusetts Attorney General’s Office has been actively scrutinizing lenders to determine whether originations take into account consumers’ capacity to repay. It settled lawsuits with Exeter Finance and Byrider in the past year, plus a case against Santander Consumer USA in 2017. The office also settled a case against Santander in 2015 related to the funding of loans that allegedly included insurance coverage that propelled loan costs above the state usury limit.
Credit Acceptance Corp. is the latest lender in Massachusetts Attorney General Maura Healy’s crosshairs. In fact, her office has been pumping CAC for information for years, and issued civil investigative demands in December 2014, November 2017 and as recently as July. But the 120-page lawsuit, filed Aug. 30, delves well beyond CAC’s origination procedures. It outlines alleged violations — dating back to 2012 — related to collection practices, repossessions, vehicle pricing and insurance contracts, and even probes CAC’s securitization practices.
Some of the unfair lending claims are similar to those leveled by the Massachusetts attorney general against Exeter and Byrider. The lawsuit alleges that the company made “high-risk, high-interest subprime loans to Massachusetts borrower whom CAC knew or should have known were unable to repay their loans.” Specifically, the CAC complaint delves into the company’s financing programs, expected collection rates and lending profits, among other issues. It alleges that CAC “recklessly ignored the likelihood that the borrowers would default on their loans” and “ignored the poor performance” on the loans “because in spite of the high level of defaults, CAC earned substantial profits.”
The lawsuit’s collection claims assert that CAC collectors “harassed” consumers by calling them as often as eight times a day — more than the two-call-per-week limit stipulated by Massachusetts law — and that 1.7 million of 2 million collection calls violated state regulations. The repossession-related claims hinge on notices issued to borrowers before and after repossessed vehicles were sold at auction, while the pricing allegations assert that the company marked up vehicle prices for consumers with low expected collection rates. The lawsuit also charges that CAC misrepresented vehicle service contracts sold to consumers, as well as securities sold to investors.
With all these operational issues under scrutiny, chances are high that other attorneys general will take a page from Attorney General Healey’s playbook. State attorneys general commonly team up on auto finance cases. For instance, the Massachusetts and Delaware Attorney General Offices collaborated on the Exeter investigation. Similarly, on Aug. 11, Maryland Attorney General Brian Frosh subpoenaed CAC for information relating to its origination and collection policies. That same day, CAC received a subpoena from New Jersey Attorney General Gurbir Grewal that was “essentially identical” to the Maryland request, the lender noted in a Securities and Exchange Commission filing. Further, Maryland’s Frosh has teamed up with 40 other attorneys general in the CAC case. In other words, 40 additional regulators now have auto finance on their radars.
To a degree, the claims against CAC mirror those outlined in a case against Santander that settled for $550 million in May. The lawsuit, initiated by the Illinois attorney general in 2015, enlisted a coalition of 33 additional attorneys general. The charges ranged from originations to collections and repossessions for loans made from 2013 through 2019. As part of the settlement, Santander agreed to forgive indebtedness, waive deficiency balances, and test defaulted loans for affordability. The lender was also ordered to modify some of its policies and procedures, and was barred from requiring dealers to sell ancillary products like vehicle service contracts.
The Massachusetts case against CAC calls for similar measures. The lender is urged to adjust its business practices, provide restitution to harmed consumers and pay civil penalties. Might this case settle out of court? Conceivably. Might the settlement amount reach into the hundreds of millions of dollars? Perhaps. But the bigger issue, in my view, is the heightened attention to the sector that could hamstring subprime lenders’ ability to operate. Certainly, misdeeds should be punished, but if subprime lenders are mandated to originate loans at margins as thin as those maintained by prime lenders, the industry will crater.
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