New York Attorney General Letitia James filed a lawsuit Wednesday against Credit Acceptance Corporation, a subprime auto lending giant she says makes its business model out of lying to and ripping off New Yorkers buying used cars.
The AG, who filed the suit in Manhattan federal court with the federal Consumer Financial Protection Bureau as co-plaintiff, says Credit Acceptance Corporation (CAC) has for years made a financial killing off of a predatory business model, dangling deceptive high-interest loans to low-income consumers in the auto market, bundling those bogus loans into securities sold to investors, and eventually repossessing nearly half the cars purchased in New York with its financing.
“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 toward financial ruin by tricking them into unaffordable, high-interest auto loans while cutting backroom deals with dealers to protect their own profits. 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.”
CAC markets itself as an alternative to traditional lenders, a bridge for low-income individuals to buy a car and build up asset-based wealth. Between 2015 and 2021, the income of the median borrower nationwide was about $35,000.
But James says the company is a wolf in sheep’s upholstery: the average annual percentage rate advertised in New York is about 23-24%, just below the 25% rate that is legally considered usury in the state. But through a complex system of deceptive accounting and collusion, more than 84% of CAC loans in New York are effectively usurious under state law, James says, with some interest rates climbing as high as 100%.
The crux of CAC’s business model, James and the CFPB allege, is its affiliation with about 12,000 used car dealerships across the country. CAC sets a minimum interest rate for financing purchases at its partner dealerships, a rate that doesn’t change regardless of a lendee’s ability to repay.
Dealerships must also utilize CAC’s proprietary software to create the loan contract, which the plaintiffs say is manipulated by dealers to incorporate the cost of the loan and inflate the price of the car well beyond what it’s worth — locking buyers into mountains of debt for a comparatively worthless asset.
Coupled with the already high interest rates and hidden fees added by dealers, CAC-financed cars become substantially more expensive than other used cars. In New York, CAC ultimately repossessed an astonishing 44% of the cars for which it provided financing, often flipping them with haste on the resale market before suing the buyer to collect on the debt.
The plaintiffs say CAC knows from the get-go that a substantial portion of its client base will default, with its proprietary algorithm projecting 25% of New York loans would not be fully paid off, but the company does not vet customers’ credit because it can still make money through default judgments and repossession.
Subprime home lending notoriously precipitated America’s worst financial collapse since the Great Depression, but the subprime auto lending sector has grown substantially in the years since, and another CAC tactic is eerily reminiscent of some of Wall Street’s most infamous pre-crisis financial products. James alleges that CAC packages its loans into securities and sells them to investors, who are not made aware of the loans’ junk status.
James says that practice is in violation of the state’s Martin Act, a 1921 statute giving the AG broad authority to prosecute financial fraud perpetrated against shareholders.
James and the CFPB are requesting the court prevent CAC from utilizing its shady tactics, void all the bogus contracts, and provide restitution to the victims. It also requests the court fine CAC $1,000,000 per day that it engaged in the alleged unlawful practices.
Reached for comment, a CAC spokesperson denied that the company had broken any laws and said the lender operates with integrity.
“Credit Acceptance operates with integrity and believes it has complied with applicable laws and regulations,” said the company’s assistant treasurer, Jeff Soutar. “We believe the complaint is without merit and intend to vigorously defend ourselves in this matter.”
