Major Subprime Auto Lender Required to Repay Victims of Bad Loans

For most Americans, a car is a day-to-day necessity for getting to work and to the doctor, and for other reasons. But for low-income and low-credit consumers, that pressing need is something predatory lenders exploit, Healey says.

In 2015, Massachusetts resident Jimoh Adeleke bought a car with financing from Credit Acceptance. Having a car was essential for him to get to his two jobs, he said during the state attorney general’s press conference.

He went with his wife to a dealership to buy a car, his first-ever vehicle purchase, and received financing through Credit Acceptance at an APR of 20.99 percent.

But after two years, in which he said he consistently made on-time payments, his wife became ill and required surgery. Adeleke says he fell behind on payments, and Credit Acceptance allegedly refused to work with him to catch up. Eventually, he defaulted on the loan.

Other borrowers who spoke at the press conference Wednesday said they were bombarded with calls from debt collectors after they fell behind on their loan payments.

“It damaged my credit horribly,” says Frank Mello, another Credit Acceptance customer, whose car was ultimately repossessed.

The lawsuit describes how Credit Acceptance runs its business.

Rather than funding loans directly to consumers, it relies on a network of dealerships that serve as intermediaries who originate financing deals with customers and receive a fee for routing the loan to them. The vast majority of Americans who obtain financing to buy a vehicle—from Credit Acceptance or from other lenders—go through a similar process.

But in its suit, the attorney general’s office alleged that Credit Acceptance controls “all aspects of the loan process.” The dealer has “no role in approving, making, documenting, funding, holding, servicing, or collecting the loan,” the attorney general’s office alleged.

The lawsuit also alleges that in some cases Credit Acceptance made money by charging “hidden” finance fees, averaging $2,500. These fees are what pushed the loans past the state limit of 21 percent APR.

To maximize profits, the attorney general’s office alleged that Credit Acceptance created a “risk score” for each loan. The payment it made to dealers was based on this assessed score, with higher-risk loans resulting in lower payment to dealers.

But in cases where loans failed, Credit Acceptance also made money from the proceeds of cars that were repossessed and sold at auction.

On average, the company earned about $3,100 profit in each transaction, the lawsuit alleged, whether or not the borrower defaulted.

The deal with Credit Acceptance is one result of a yearslong investigation by Healey’s office into the auto lending industry, which remains ongoing. Her office has secured multiple settlements with various lenders in recent years for similar conduct and required lenders to change their lending practices.

CR’s Bell says auto lenders should be required to follow standards that ensure borrowers can repay their loans.

“Ability-to-repay standards are critically important for protecting low- and moderate-income borrowers, to avoid the harsh consequences of default, repossession and damaged credit,” Bell says. “If companies make overly expensive loans that they know borrowers can’t repay, they are just setting people up for failure.”