Southfield-based Credit Acceptance Corp., which made its mark offering auto loans to those who have bad credit and might not qualify for an auto loan otherwise, is accused by regulators of making predatory deals that set financially vulnerable buyers up to fail.
The auto loans for the used cars carry “exorbitant interest rates, are loaded with expensive add-on products, and saddle borrowers with debts” that even the lender believes that borrowers cannot afford to repay in full, according to a complaint filed Wednesday.
New York Attorney General Letitia James and the Consumer Financial Protection Bureau on Wednesday jointly sued Credit Acceptance Corporation for deceiving thousands of low-income New Yorkers into high-interest car loans.
Michigan is not mentioned in the complaint. But the Michigan Department of Attorney General is participating in a multistate investigation, according to a spokesperson late Wednesday.
Add-on products that end up being financed, driving up borrowing costs, include a vehicle service contract that promises to repair or replace certain parts and a guaranteed asset protection product or “GAP” that is to cover the amount borrowers owe after an insurance payout if the used car or truck is stolen or totaled in an accident.
The complaint charged that dealers affiliated with Credit Acceptance deceptively hid the add-on products in loan paperwork or failed to disclose to borrowers that add-on products were included in the loan agreements.
The lawsuit alleges that Credit Acceptance Corp. pushed unaffordable loans onto tens of thousands of low-income consumers throughout New York without considering their ability to repay their loans in full.
The company defended its practices in a short statement given to the Detroit Free Press.
“Credit Acceptance operates with integrity and believes it has complied with applicable laws and regulations. We believe the complaint is without merit and intend to vigorously defend ourselves in this matter.”
Credit Acceptance Corp. is one of the nation’s largest publicly traded auto lenders and does businesswith a network of more than 12,000 affiliated used car dealers to offer loans to high-risk borrowers with subprime and deep subprime credit histories.
The interest rate charged on these loans is often around 22%, according to the joint complaint by the federal consumer watchdog agency and the New York Attorney General.
In addition, the complaint charged that the financial services company’s business model “pushes dealers to manipulate the prices of vehicles sold” to Credit Acceptance borrowers, often hiding an additional cost of credit in the principal amount financed by the loan.
In addition, the complaint said, dealers routinely fail to provide consumers with copies of their contracts with Credit Acceptance, “thereby concealing the improper and abusive contract terms.”
The complaint noted that consumers are often left in worse shape financially.
As a result of the company’s lending model, the complaint noted many consumers who receive the auto loans from Credit Acceptance Corp. end up defaulting. And they end up losing their vehicles and losing any trade-in value or down payments.
“Consumers face an average post-auction debt of about $8,500,” the complaint noted. The company often continues to collect by suing borrowers. One troubling point involves loan amounts that can be artificially inflated by add-ons that were financed, according to the consumer watchdogs. Consumers who try to sell their vehicle or whose vehicles are repossessed and auctioned “find that the proceeds of the sale do little to help pay off their debt,” according to the complaint.
“Over and over, repossession, garnishment, and bankruptcy result,” the complaint noted. “Consumers who lose their vehicles then sometimes lose their jobs and face family difficulties as well. But despite the significant humantoll borne by consumers, CAC continues to profit.”
The finance company’s “lending model is indifferent as to a consumers’ ability to repay loans in full,” the complaint stated. Instead, the company uses a complex algorithm to predict how much money Credit Acceptance expects to collect on the loan.
That amount isn’t just from monthly payments, the complaint filed in the U.S. District Court for the Southern District of New York stated. The company also takes into account, according to the complaint, “potential collection efforts, repossessions, auctions and deficiency judgments if the consumer defaults.”
The Consumer Financial Protection Bureau stated that the “car-buying experience turns into a nightmare” for many of these borrowers. The consumers face “unaffordable monthly payments, vehicle repossessions and debt collection lawsuits.”
The joint complaint alleges that, among other things, Credit Acceptance hides costs in loan agreements and sets consumers up to fail.
Between January 2017 and August 2020, the complaint noted, Credit Acceptance received nationwide more than1,000 consumer complaints related to add-on products, including complaints that dealers were requiring borrowers to purchase add-on products in order to obtain a Credit Acceptance loan agreement. Borrowers also complained that they were unaware that an add-on product was included in their contract and discovered the product only after the transaction was completed.
The New York Attorney General’s Office claimed that one consumer, who supports two children, signed up for a Credit Acceptance Corp. loan requiring her to pay more than $13,000. The dealer needed $5,614 to sell her the car. After she paid more than $7,600 to Credit Acceptance, the New York Attorney General noted, they repossessed her vehicle, sold it at auction, and sued her for more than $7,500.
New York Attorney General James stated in the news release that the company “claimed to help low-income New Yorkers purchase cars, but instead, drove them straight into debt.”
New Yorkers, James said, were steered “toward financial ruin” when they were tricked into unaffordable, high-interest auto loans. “These predatory actions hurt innocent people and left them with mountains of debt. I thank the CFPB for their partnership to stop this harm and protect everyday New Yorkers,” James said.
The lawsuit seeks to end Credit Acceptance Corp.’s “abusive and deceptive practices, reform or eliminate existing CAC loan agreements, and collect restitution for impacted consumers,” according to the New York Attorney General.
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Credit Acceptance has offered financing programs since 1972, according to the company, that enable auto dealers to sell vehicles to consumers, regardless of their credit history.
“Without our financing programs, consumers are often unable to purchase vehicles or they purchase unreliable ones,” the company states online.
The company says it provides a second chance to consumers who are able to purchase vehicles while reestablishing their credit. Their purpose statement: “We change lives!”
Credit Acceptance reports payments to the three national credit reporting agencies, which it says gives consumers an opportunity to improve “their credit score and move on to more traditional sources of financing.” Credit Acceptance is publicly traded on the Nasdaq Stock Market under the symbol CACC.
Credit Acceptance stock fell after the news of the action by regulators. The stock closed at $403.49 a share, down $52.99 or 11.61% Wednesday.
The finance company had 2,069 employees in the United States, including 1,186 employees in Michigan as of October 2022.