As subprime auto finance delinquencies rise in the face of the COVID pandemic, State Attorneys General (AGs) have become more aggressive in investigating subprime auto lenders for compliance violations. The familiar unfair and deceptive acts and practices (UDAPs) state law prohibitions provide the basis to do so.
The Massachusetts Attorney General has been a leader in pursuing and settling with subprime auto lenders.
In 2017, the Mass AG acting in conjunction with the Delaware AG, settled with Santander Bank and its affiliates. The settlement included $16 million in relief to more than 2,000 affected consumers and a $6 million payment to Massachusetts. Santander was charged with facilitating unfair, high-rate auto loans to subprime Massachusetts residents. This was the first time an AG entered into a consent decree with a subprime auto lender.
Massachusetts charged that Santander’s own internal audit concluded that the company’s oversight of auto dealer conduct when making subprime loans was inadequate. Despite identifying a group of dealers that had extremely high default and delinquency rates and other problems, the company continued to fund loans through these dealers. Santander also allegedly identified a group of dealers it called the “fraud dealers,” but continued to fund loans through them. Presumably, there was fallout to these dealers in the aftermath of the settlement.
But Massachusetts was not done. In 2019, the Mass AG settled with Exeter Finance for the sum of $5.5 million, including $4.675 million for consumer redress as well as Exeter agreeing to waive deficiencies and reform adverse credit reporting on certain subprime consumers.
The AG’s Office alleged that Exeter facilitated the origination of Massachusetts auto loans that the company knew or should have known were unfair and in violation of the state Consumer Protection Law. The AG claimed that courts have held that lending is unlawful under the statute if lenders do not have a basis for believing that borrowers will be able to repay their loans in normal course. Exeter also allegedly mishandled servicing and collecting activities in violation of the Attorney General’s debt collection regulations.
The Delaware Attorney General piggybacked the Massachusetts AG and also settled with Exeter as it had with Santander. But these two AGs and their counterparts were not done.
In 2020, led by the Illinois Attorney General, 34 Attorneys General settled with Santander for approximately $550 million in relief for consumers plus additional deficiency waivers. The settlement resolved allegations that Santander violated consumer protection laws by exposing subprime consumers to unnecessarily high levels of risk and knowingly placing these consumers into auto loans with a high probability of default through the use of sophisticated credit scoring algorithms.
The suit also claimed Santander failed to monitor dealer behavior to minimize the risk of receiving falsified information on credit applications and power booking of vehicles.
Now, the Massachusetts and Mississippi Attorneys General have filed lawsuits against Credit Acceptance Corporation (CAC) which promotes that it finances nearly everyone using models and methodology that projects levels of delinquency on a macro basis for users based on credit score. So, going in, CAC knows that a high percentage of its borrowers will default and dealer compensation is adjusted downward accordingly. This business model which allegedly promotes higher dealer markup on vehicles and aftermarket products is what the Massachusetts AG argues is an unfair trade practice.
What This Means for Dealers
The aggressive AG pursuit of subprime lenders starts with claims that consumers are being treated unfairly by dealers or that lenders are being deceived by falsified credit applications and power booking. For an Attorney General, a large lender makes an easier target on a big stage but, back home, you can be sure this all signals a greater level of scrutiny of dealers for UDAP violations as well.
There is also certain to be consequences as these lenders attempt to point the fingers at dealers being the real problem regardless of how they underwrite financing. Claims of excessive markups on used vehicle and payment protection products, dealers requiring vehicle service contracts as a condition to getting financed, and the familiar claim of dealers putting consumers into credit with hidden rate markups are sure to follow. State coffers are hurting at the present time and many AGs see dealers as low-hanging fruit for fines and penalties.
None of this means you should not offer financing to subprime consumers provided you do not make any misrepresentations in obtaining the financing either to the consumer or the finance company. These transactions will be more heavily scrutinized so make sure to dot your “i” s and cross your “t” s. The subprime area presents a series of challenges that prime financing may not.
The Massachusetts Attorney General has been a leader in pursuing and settling with subprime auto lenders.
In 2017, the Mass AG acting in conjunction with the Delaware AG, settled with Santander Bank and its affiliates. The settlement included $16 million in relief to more than 2,000 affected consumers and a $6 million payment to Massachusetts. Santander was charged with facilitating unfair, high-rate auto loans to subprime Massachusetts residents. This was the first time an AG entered into a consent decree with a subprime auto lender.
Massachusetts charged that Santander’s own internal audit concluded that the company’s oversight of auto dealer conduct when making subprime loans was inadequate. Despite identifying a group of dealers that had extremely high default and delinquency rates and other problems, the company continued to fund loans through these dealers. Santander also allegedly identified a group of dealers it called the “fraud dealers,” but continued to fund loans through them. Presumably, there was fallout to these dealers in the aftermath of the settlement.
But Massachusetts was not done. In 2019, the Mass AG settled with Exeter Finance for the sum of $5.5 million, including $4.675 million for consumer redress as well as Exeter agreeing to waive deficiencies and reform adverse credit reporting on certain subprime consumers.
The AG’s Office alleged that Exeter facilitated the origination of Massachusetts auto loans that the company knew or should have known were unfair and in violation of the state Consumer Protection Law. The AG claimed that courts have held that lending is unlawful under the statute if lenders do not have a basis for believing that borrowers will be able to repay their loans in normal course. Exeter also allegedly mishandled servicing and collecting activities in violation of the Attorney General’s debt collection regulations.
The Delaware Attorney General piggybacked the Massachusetts AG and also settled with Exeter as it had with Santander. But these two AGs and their counterparts were not done.
In 2020, led by the Illinois Attorney General, 34 Attorneys General settled with Santander for approximately $550 million in relief for consumers plus additional deficiency waivers. The settlement resolved allegations that Santander violated consumer protection laws by exposing subprime consumers to unnecessarily high levels of risk and knowingly placing these consumers into auto loans with a high probability of default through the use of sophisticated credit scoring algorithms.
The suit also claimed Santander failed to monitor dealer behavior to minimize the risk of receiving falsified information on credit applications and power booking of vehicles.
Now, the Massachusetts and Mississippi Attorneys General have filed lawsuits against Credit Acceptance Corporation (CAC) which promotes that it finances nearly everyone using models and methodology that projects levels of delinquency on a macro basis for users based on credit score. So, going in, CAC knows that a high percentage of its borrowers will default and dealer compensation is adjusted downward accordingly. This business model which allegedly promotes higher dealer markup on vehicles and aftermarket products is what the Massachusetts AG argues is an unfair trade practice.
What This Means for Dealers
The aggressive AG pursuit of subprime lenders starts with claims that consumers are being treated unfairly by dealers or that lenders are being deceived by falsified credit applications and power booking. For an Attorney General, a large lender makes an easier target on a big stage but, back home, you can be sure this all signals a greater level of scrutiny of dealers for UDAP violations as well.
There is also certain to be consequences as these lenders attempt to point the fingers at dealers being the real problem regardless of how they underwrite financing. Claims of excessive markups on used vehicle and payment protection products, dealers requiring vehicle service contracts as a condition to getting financed, and the familiar claim of dealers putting consumers into credit with hidden rate markups are sure to follow. State coffers are hurting at the present time and many AGs see dealers as low-hanging fruit for fines and penalties.
None of this means you should not offer financing to subprime consumers provided you do not make any misrepresentations in obtaining the financing either to the consumer or the finance company. These transactions will be more heavily scrutinized so make sure to dot your “i” s and cross your “t” s. The subprime area presents a series of challenges that prime financing may not.
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