N.Y., CFPB sue Credit Acceptance, allege unaffordable, misleading loans

Regulators want the company to halt abusive and deceptive practices, reform or eliminate existing CAC loan agreements and collect restitution for impacted consumers.

In 2021, CAC was sued by the Massachussetts attorney general on charges it “harassed” borrowers and misinformed investors. The following year, the company settled a lawsuit with shareholders stemming from the Massachussetts case. CAC’s 2022 Q3 earnings report showed an increase in auto loan volume but a big drop in net income.

The lawsuit used a February 2016 loan to borrower “Ms. B” to make its case.

After applying a $2,250 trade-in towards the deal, Ms. B borrowed $8,292.10 for a vehicle at an interest rate of 23.99 percent. She would pay $13,301.31 — the other $5,009.21 representing the cost of the credit — in $260.81 payments over the life of the 51-month loan.

However, Credit Acceptance scored Ms. B a 60.1, indicating it only expected her to pay about 60 percent of the $13,301.31, or $7,994.

“After gathering information about Ms. B and her creditworthiness, CAC paid the dealer approximately $5,614 for this loan, a critical aspect of the transaction that does not appear anywhere on the loan contract,” the lawsuit states. “That dollar figure, not the amount financed, is the amount CAC has put at risk for this loan, and CAC can profit (roughly speaking) if it collects more than that amount. CAC does not need to collect the full amount financed to profit.”

Dealers are offered about 72 percent of the amount Credit Acceptance anticipates it can collect on the loan, the lawsuit states.

The lawsuit argued that Ms. B has paid or promised to pay $10,542,10 (the down payment plus loan amount) before interest. But the dealership’s willingness to accept $7,864 (the down payment plus Credit Acceptance payment) for the vehicle meant that amount represented the cash price for the model, according to the lawsuit. The remaining $2,678.10 represented a hidden finance charge, the lawsuit alleged.

“The difference between the total disclosed cost of the CAC-financed transaction (minus interest) and the Dealer Compensation (as a proxy for the true amount dealers would have accepted in an all-cash purchase for a vehicle and add-on products, if applicable) constitutes a finance charge that is hidden from the borrower as part of the amount financed on a CAC loan agreement — it is an amount that a cash consumer would not have been charged.”

This hidden financing often pushed Credit Acceptance interest rates above New York’s 25 percent usury cap, even in situations where dealers later received an “earnout” bonus for customers dilligent about making payments, according to the lawsuit.

Credit Acceptance also doesn’t expect its customers to make good on their loans, according to the litigation.

“CAC claimed to help low-income New Yorkers purchase cars, but instead, drove them straight into debt,” James said in a statement. “CAC steered hardworking New Yorkers onto a path of financial ruin by tricking them into unaffordable, high-interest auto loans while cutting backroom deals with dealers to increase their own profits. These predatory actions hurt innocent people and left them with mountains of debt.”

Credit Acceptance forecasts it will only collect 66 percent of the amount owed on its loans in New York and 64 percent nationwide once factors such as reposessions and late fees are taken into account, according to the lawsuit.

“Indeed, between roughly 25% (New York) and 39% (nationwide) of CAC’s loans were so clearly unaffordable that CAC’s projected collections were less than the amount financed, or purported principal,” the lawsuit states.

Yet the lender teaches dealerships to tell customers its loans will “change their lives” and represent a chance to improve customer credit. The median Credit Acceptance borrower during the time period scrutinized by the lawsuit had a credit score of 546 and a gross income of $35,000.