Major Subprime Auto Lender Required to Repay Victims of Bad Loans

Credit Acceptance Corp. will pay $27 million to settle claims it levied hidden finance charges on consumers and charged usurious interest

A car lot seen from above Photo: Alan Schein/Getty Images

Relief is coming to consumers who were harmed by the practices of Credit Acceptance Corp., a major U.S. subprime auto lender.

The company has been ordered to pay $27.2 million to settle claims it made loans to consumers in Massachusetts it knew could not afford to repay them, a state regulator announced Wednesday.

In a press conference, Massachusetts Attorney General Maura Healey called the settlement an “important recovery for consumers, one that will provide meaningful money, compensation, as well as debt relief, to thousands of people across Massachusetts.”

More on Auto Lending

Healey’s office will contact the more than 3,000 borrowers eligible for relief. Any borrowers with questions about eligibility were directed to call Healey’s office at 617-963-2240.

Credit Acceptance markets itself as the go-to place for consumers who have a low credit score and need to finance the purchase of a car. The company works with more than 12,000 dealers around the country and funded more than 300,000 loans in 2020, according to a recent investor filing.

In 2020, Healey’s office sued the lender, alleging that beginning in 2013 it made thousands of loans to consumers it “knew or should’ve known” could not repay them. Credit Acceptance also allegedly assessed hidden finance charges that made the loans usurious under Massachusetts law, which prohibits charging an annual percentage rate (APR) above 21 percent.

Based on the company’s own repossession and loan data, the lawsuit alleged, Credit Acceptance knew that “well over 50 percent of high-risk, low-score borrowers would default, typically a little more than a year into their loans.” 

Under the settlement agreement, Credit Acceptance made no admission of liability. The company didn’t immediately respond to a request for comment but in a public statement issued Wednesday afternoon said it was “pleased” to put the case behind it.

“The Company looks forward to continuing to serve customers in the Commonwealth of Massachusetts through its financing programs,” the statement says.

The Massachusetts case is likely just the tip of the iceberg, says Chuck Bell, a Consumer Reports programs director. “CR encourages other states to provide strong oversight of auto lenders, to make sure they are obeying state interest rate caps and lending laws, and not packing hidden finance charges or fees into the loans,” he says.

'Damaged My Credit Horribly'

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.

'Hidden' Finance Charges

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.

Industrywide Investigation

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.”


Head shot of Ryan Felton, a CR author of investigative reports and special projects

Ryan Felton

I'm an investigative journalist with an appetite to cover anything and everything. My job and goal is to dig into complicated issues that affect people's health, safety, and bottom line. I've covered everything from dangerous tires to subprime lending to corporate malfeasance. Got a tip? Drop me an email ( ryan.felton@consumer.org), or follow me on Twitter ( @ryanfelton) for my contact info on Signal.