Massachusetts Throws in the Towel with Credit Acceptance Corporation

In 2020 the Massachusetts Attorney General brought one of the most significant consumer finance cases in years, a suit against subprime auto lender Credit Acceptance Corporation.  If you haven’t heard of CAC, it’s a one of the largest subprime auto lenders, and its stock has been one of the hottest growth stocks in recent years.  CAC is an indirect lender, meaning that it doesn't make the loan directly to the consumer, but instead purchases the loan from the dealer (who will not make the loan until the purchase is lined up).  

The suit contained a couple of really revolutionary claims, and Massachusetts was initially successfully, winning summary judgment on one count this spring and defeating the motion to dismiss on all challenged counts. The suit recently settled and for a surprisingly low amount and with virtually no meaningful prospective relief. CAC certainly had some possible defenses, but Massachusetts really seemed to be in a strong position, so it's a bit of a head scratcher what happened. 

The suit alleged several different violations of Massachusetts’s UDAP statute and other provisions,:

• CAC was funding loans “in complete and reckeless disregard of risk of default”. In other words, the loans (yes, they’re technically retail installment contracts, but everyone calls them loans) were made without regard to the borrower’s ability to repay. 
• CAC purchased loans from dealers at a discount from face. Massachusetts alleged that the discount was effectively a finance charge (in part because dealers would increase the sale price to account for the subsequent discount).  If the discount were a finance charge, the result that the interest rate on the loans exceeded the state’s 21% usury cap.
• CAC allowing dealers to require the purchase of vehicle service contracts (VSCs), meaning that the VSC premium is a finance charge, again pushing the interest rate above the usury cap. Massachusetts alleged that there was 100% penetration of VSCs, a sign that dealers were requiring the VSCs as a condition of financing (i.e., loan packing).
• CAC was harassing consumers with repeated collection calls in excess of the weekly call limit allowed by state law.
• CAC was providing defective pre- and post-sale repo notices because the notices did not calculate the deficiency amount based on the fair market value of the vehicle, but instead used the (much lower) actual sale price.
• Securities fraud for securitizations based on deceptive statements about the loans’ characteristics.

The ability-to-repay and the discounting claims were revolutionary.  While consumer finance regulation has been moving toward ability-to-repay requirements generally, there is no express statutory requirement for auto loans.  Massachusetts has previously settled with a couple of lenders on ability-to-repay grounds, and there was a multi-state settlement with Satander that included ability-to-repay, but it’s never been litigated, and Massachusetts has the most favorable law in the country for such a case:  in a 2008 landmark decision, the Massachusetts Supreme Judicial Court ruled that mortgages that were “doomed to fail” were made in violation of its UDAP statute. 

Similarly, the discounting had the potential to completely reshape the economics of indirect subprime auto lending by making it difficult for finance companies to buy car paper at a discount without violating state usury laws.

So how did this all pan out?  In May, Massachusetts won summary judgment on the repo notices and defeated motions to dismiss on the discounting, VSC, and call frequency, and securities fraud charges (no MTD was filed on ability-to-repay).  Massachusetts failed to get summary judgment on the call frequency, but the cause of action remained alive.  In short, it was a clear win for Massachusetts.  And then….

In April, CAC announced that it had reached a “settlement in principle” with Massachusetts.  At the same time CAC announced the unplanned retirement of its CEO and an expansion of its board of directors.  Strangely, Massachusetts was silent about the settlement until the start of this month, when Massachusetts filed a notice of its settlement with CAC. 

The settlement ended this potentially revolutionary litigation with a whimper, not a bang.  Under the terms of the settlement CAC will pay out $27M for borrower relief.  Additionally, CAC agreed to waive deficiencies on certain loans.  That is, the $27M is all about existing harms.  It does not constrain CAC’s behavior going forward.  The prospective relief is very limited:  CAC agreed to comply with Massachusetts’s limits on frequency of collection calls (counting calls that go to voice mail toward that limit).  CAC also agreed to give proper pre- and post-sale repossession notices.  And CAC agreed that it would give borrowers a 1 page form prominently disclosing that VSCs are not required and can increase the amount financed. CAC also agreed to let borrowers cancel VSCs within 30 days of the contract. 

Notice what’s missing here. Not a word about ability-to-repay.  Not a word about dealer markups being based on the borrower’s credit quality. Not a word about markups counting as finance charges and therefore pushing the interest rate over the state’s 21% usury cap. 

In other words, Massachusetts settled for a very small amount of money and the most minimal prospective relief.  The prospective relief is all on the small potatoes claims.  The prospective relief on call frequency and repo notices and VSCs was an easy give for CAC.  Massachusetts might not have been able to win a civil monetary penalty on the call frequency because of the question about how many calls were actually picked up by borrowers, but surely it could have gotten injunctive relief on the issue without too much difficulty.

For the repo notices, Massachusetts had already won summary judgment. They avoided an appeal by settling, and using FMV, rather than actual sale price will surely reduce deficiencies for borrowers going forward. But it's notable that CAC is still going to be able to collect deficiencies from borrowers without having verified ability to repay. 

As for the VSC relief, the injunctive relief is unlikely to be effective. It’s just disclosure and an ex post right to cancel.  Let’s be frank. Disclosures are basically worthless in the auto lending context.  The disclosure is going to be made to the consumer at the end of a long process.  The consumer is exhausted and just wants to be done and to have the car.  The disclosure is going to be made together with a  bevy of other disclosures, some relating to financing, some to things like the odometer reading and lemon laws and titling, etc.  It will be made after the consumer has struck the deal and agreed to purchase the VSC. There’s little chance that a consumer is going to pay attention to the extra sheet of paper or will decide to reopen the deal now that he is informed that the VSC isn’t required.  If the dealer is packing the loan (and it sure looks like it given the 100% VSC penetration that Massachusetts alleged), this isn’t going to stop it.  Nor is the ex post cancellation right.  If the consumer wasn’t focused on the VSC at the closing, it’s really unlikely that the consumer is going to pay attention to an ex post VSC cancellation notice.  The consumer is likely to just throw out the notice or, at best, worry about the hassle of cancelling the VSC and the unexpected cancellations that will surely arise from messing around with it (for there’s no chance the process will go smoothly). My prediction is that VSC penetration will remain close to 100%.  

Frankly, this case puzzles me in lots of ways.  Massachusetts’s suit was very aggressive. It knocked $2B off CAC’s market cap when it was filed.  Massachusetts then won on most of the key parts of the motion to dismiss and even won summary judgment on one count.  There were certainly some credible defenses to the ability-to-repay, discounting, and VSC claims, but the facts for CAC were really ugly with default rates alleged to be around 50%.  That sure looks like a "doomed to fail" loan. In short, Massachusetts looked to be in a very strong position.  That’s what makes this milquetoast settlement so surprising, particularly in light of the stronger settlements Massachusetts previously negotiated with other subprime lenders.  All I can say is that I’m puzzled. 

Comments

[cb]

fascinating post. would love to know if you get any follow-up info from anyone in the know!

[Sam Turco]

Good article Adam. Ok, I'm debtor's counsel in lots of Chapter 13 cases. I want to apply this if possible.

Example:

Debtor buys car for 10k with loan at 18% interest payable over 5 years with payments of $253.93.

Car lot sells loan paper to subprime lender immediately and is paid 8k. So, in reality the car was sold for 8k. That's my argument.

I would argue the true interest rate is $28.999% (assuming the court agrees that the true purchase price was 8k). Such a rate is usury in my state (Nebraska).

Application to Chapter 13.

Debtor cannot cramdown under Section 506 since the loan was incurred to buy a vehicle within 910 days. But . . . . what is the purchase price? Is it 10k or 8k???

I want to argue the purchase price is 8k and pay no interest at all since the penalty for usury in my state is the lender gets no interest.

The loan is just form over substance. Everyone knows the true purchase price is 8k.

Is there any precedent in Chapter 13 litigation to support this concept?