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U.S., New York sue Credit Acceptance, allege predatory auto lending; shares slide

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New York Attorney General Letitia James delivers remarks at the New York Democratic party 2022 State Nominating Convention in Manhattan in New York City, U.S., February 17, 2022. REUTERS/Mike Segar/File Photo

Credit Acceptance Corp (CACC.O) was sued on Wednesday by the U.S. Consumer Financial Protection Bureau and New York Attorney General Letitia James, who said the subprime auto lender engaged in predatory lending by driving low-income borrowers into used-car loans it knew they could not afford.

The regulators said Credit Acceptance “sets consumers up to fail” by charging exorbitant interest rates averaging 22%, and entering arrangements with dealers that mask the true cost of borrowing and sometimes violate state usury laws.

“Credit Acceptance obscured the true cost of its loans,” subjecting car buyers to severe financial distress and aggressive debt collection “on loans its own systems predicted that borrowers can’t afford to repay,” CFPB Director Rohit Chopra said in a statement.

Regulators want the Southfield, Michigan-based company to fix abusive loans, offer restitution, and pay civil penalties of at least $1 million per day for violating federal consumer protection laws.

Shares of Credit Acceptance fell as much as 14.3% to $391.22 after the lawsuit was filed in Manhattan federal court. They were down 11% at $406.10 in mid-afternoon trading.

Credit Acceptance, which says its financing benefits vehicle buyers “regardless of their credit history,” did not immediately respond to requests for comment.

The lawsuit covers the period from November 2015 to April 2021, when an estimated 1.9 million consumers with a median 546 FICO credit score and $35,000 annual gross income borrowed from Credit Acceptance.

Regulators said Credit Acceptance relies on an algorithm that predicts how much it can collect from borrowers, including from repossessions following defaults, without regard for their ability to pay.

They also said Credit Acceptance encourages dealers to tack on expensive products such as vehicle service contracts without disclosing them in loan agreements.

In one alleged instance, Credit Acceptance approved Ms. B, a mother of two who made just $950 per month, for a $260-a-month loan, betting it would collect $7,994.

Actual collections topped $8,400, and the mother’s vehicle was repossessed twice, the complaint said.

“While Ms. B’s finances were decimated, CAC profited,” the complaint said.

The case is Consumer Financial Protection Bureau et al v Credit Acceptance Corp, U.S. District Court, Southern District of New York, No. 23-00038.

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