The Southfield-based regulator, which provides car loans to those with bad credit and may not qualify for a car loan, is accused of making predatory deals that put financially vulnerable buyers on the brink of failure.
Auto loans for used cars carry “exorbitant interest rates, are loaded with expensive add-ons, and borrowers are so indebted” that even the lender believes the borrowers can’t repay in full, according to a complaint filed Wednesday.
New York Attorney General Letitia James and the Consumer Financial Protection Bureau on Wednesday filed a joint lawsuit against Credit Acceptance Corporation for defrauding thousands of low-income New Yorkers out of high-interest auto loans.
Additional products that are ultimately financed, driving up borrowing costs, include a vehicle service contract that promises to repair or replace certain parts and a guaranteed asset protection or “GAP” product to cover the amount borrowers owe after insurance payouts if the vehicle is stolen or used truck or had an accident.
The complaint accused Credit Acceptance dealers of deceptively concealing additional products in loan papers or failing to disclose to borrowers that the additional products were included in loan agreements.
The lawsuit alleges that Credit Acceptance Corp. paid out unaffordable loans to tens of thousands of low-income consumers across New York without considering their ability to repay their loans in full.
The company defended its practices in a short statement provided to the Detroit Free Press.
“Acceptance of Credit operated with integrity and we believe it 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 works with a network of over 12,000 affiliated used car dealers to offer loans to high-risk borrowers with deep credit histories in subprime and credit.
The interest rate charged for 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 “drives dealers to price-gouge autos sold” to borrowers who accept credit, often hiding an additional cost of credit in the principal amount the loan is financing.
In addition, the complaint said, merchants routinely fail to provide consumers with copies of their contracts with credit accepted, “thus masking inappropriate and abusive contract terms.”
The complaint noted that consumers are often left worse off financially.
As a result of the company’s lending model, the complaint indicated that many consumers who receive auto loans from Credit Acceptance Corp. end up in default. They end up losing their cars and losing any trade-in value or down payments.
The complaint noted that “consumers face an average post-auction debt of approximately $8,500.” Often the company continues to collect by suing the borrowers. One point of concern is loan amounts that could be artificially inflated by funded additions, according to consumer watchdogs. According to the complaint, consumers who attempt to sell their cars or whose vehicles have been repossessed and auctioned “find that the proceeds from the sale do little to help pay off their debt.”
“Again and again, property repossession, foreclosure and bankruptcy,” the complaint noted. “Consumers who lose their cars sometimes lose their jobs and face family difficulties as well. But despite there being significant hemantol that consumers are responsible for, CAC continues to turn a profit.”
“The finance company’s lending model is indifferent to the ability of consumers to repay loans in full,” the complaint states. Instead, the company uses a complex algorithm to predict how much the credit acceptor is expected to charge on the loan.
The complaint filed in the US District Court for the Southern District of New York stated that this amount is not only from the monthly payments. The company also takes into account, according to the complaint, “potential collection efforts, property returns, auctions, and shortage provisions in the event of a consumer default.”
The Consumer Financial Protection Bureau stated that “the car buying experience turns into a nightmare” for many of these borrowers. Consumers face “unaffordable monthly payments, vehicle repossessions, and debt collection lawsuits.”
The common complaint alleges, among other things, that accepting credit hides costs in loan agreements and puts consumers on the brink of failure.
Between January 2017 and August 2020, the complaint indicated that Credit Acceptance nationwide received more than 1,000 consumer complaints related to add-on products, including complaints that merchants were asking borrowers to purchase additional products in order to obtain a Credit Acceptance loan agreement. Borrowers also complained that they were unaware that an additional product was included in their contract and only discovered the product after the transaction was complete.
The New York Attorney General’s office alleged that one consumer, who supports two children, signed up for a loan from a credit acceptance company that required her to pay more than $13,000. The dealer needed $5,614 to sell the car. After she paid more than $7,600 to accept the credit, noted the New York Attorney General, they recovered her car, sold it at auction, and sued her for more than $7,500.
New York Attorney General James stated in the press release that the company “claimed to help low-income New Yorkers buy cars, but instead drove them straight into debt.”
New Yorkers were headed “towards financial ruin,” said James, when they were scammed out of unaffordable high-interest car loans. “These atrocities have harmed innocent people and left them with mountains of debt. I thank the CFPB for their partnership to stop this harm and protect New Yorkers every day,” said James.
The lawsuit seeks to end Credit Acceptance Corp.’s “abusive and deceptive practices, repair or cancel existing CAC loan agreements, and collect compensation for affected consumers,” according to the New York attorney general.
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Accepting Credit has offered financing programs since 1972 that, according to the company, enable auto dealers to sell cars to consumers, regardless of their credit history.
“Without our financing programs, consumers are often unable to purchase vehicles or buy unreliable vehicles,” the company says online.
The company says it provides a second chance to consumers who are able to buy cars while re-establishing their credit. Statement of purpose: “We change lives!”
Credit Acceptance reports payments to the three national credit reporting agencies, which it says gives consumers a chance to improve their “credit score and move to more traditional sources of financing.” Acceptance of Credit is publicly traded on the Nasdaq Stock Exchange under the symbol CACC.
Credit acceptance stocks fell after 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 in Michigan as of October 2022.
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