Loan origination procedures — from licensing to APRs to aftermarket products — are routinely scrutinized by the Public Protection and Advocacy Bureau within the Massachusetts attorney general’s office.
“Massachusetts is one of the top states in terms of licensing, oversight, and consumer protections in the finance world,” Enyart said. “The state is rigorous in monitoring many consumer protections.”
The state is known for paying close attention to rules for calculating APR, especially when a lender has guaranteed-asset protection insurance (GAP) or another ancillary product involved, Redding said.
“In Massachusetts, there are these regulations that can trip up auto finance companies, and the regulators have proven they are ready to pounce,” said Hudson Cook LLP attorney Patty Covington. “They’re looking for opportunities to go after the financial institutions.”
Some of the stepped-up regulations relate to back-end products. “Lenders are allowing large warranty contracts and GAP contracts to be included in the amount financed,” said Mike Lavin, executive vice president and chief legal officer at Consumer Portfolio Services. “That allows the dealer to make a profit on back-end products and allows them to get the deal on competitors that allow strict credit criteria.”
But overcharging for back-end products raises monthly payments and can create challenges for consumers. “It’s a problem for the industry,” Lavin said. “Regulators look at the customer’s ability to pay, and if there are excessive warranty and excessive aftermarket products sold to customers, that could be a problem.”
The state is also more heavily focused on financial institutions monitoring the performance of contracts purchased from dealers, Redding noted. “In other words, identifying dealers who may be resulting in outsized losses, which may indicate that there is something going on with that dealership and [dictate] whether the financier should be purchasing from the dealership,” he said.
In January, Massachusetts Attorney General Maura Healey ordered Danbury, Conn.-based Sensible Auto Lending LLC to pay $733,925 to resolve allegations it knowingly facilitated the sale of defective vehicles by certain used-car dealerships. The auto lender agreed to provide relief for consumers who were “cheated” by F&R Auto Sales Inc. and three other Massachusetts dealerships from August 2012 to December 2016, Healey said in a statement.
The investigation found that the lender had provided financing for “defective and inoperable vehicles” despite knowing of consumer complaints against the dealerships and customers’ high default and repossession rates. The state attorney general also found that F&R Auto failed to assign titles to vehicles or to provide documents about vehicle sales. The now-defunct dealership and its former owner were fined $450,000 in restitution and penalties to resolve the allegations.
“The Massachusetts attorney general office has been very forthcoming that they are and will continue to keep a close eye on the auto finance industry,” Redding said. “They take that very seriously. They are very upfront about the fact that auto is the second largest purchase a consumer will make, and they’re very focused on the impact on that transaction on Massachusetts residence.”
Credit Acceptance Corp. is among one of the lenders being investigated by the Massachusetts attorney general. In December 2014, Credit Acceptance received a civil investigative demand (CID) from the Massachusetts AG’s office relating to the origination and collection of nonprime auto loans in Massachusetts. Three years later, the lender received a second CID, seeking additional information related to origination and collection of consumer loans, along with information regarding securitization activities. No timeline has been provided for how long the investigation will take.