Giant auto lender did not grant borrowers a moratorium during Covid
Monique Williams lost her job as a receptionist in a Detroit apartment building during the Covid-19 pandemic last year. Now she is learning how difficult it is to get back on track with her debts.
Perhaps her biggest challenge was the expensive car loan she received from Credit Acceptance Corp. in 2016.
Williams said that when she and her husband struggled to meet their obligations last year, she asked Credit Acceptance if she could temporarily pay a smaller amount or defer her payments. While the company offered some Covid-19-related safeguards – the suspension of late fees and withdrawals – deferrals weren’t an option.
“I paid for this car for four years – over $ 12,000 – and I couldn’t even get a reprieve,” Williams said. The car died in December 2019, she said, but the roughly $ 2,000 loan is still outstanding.
Cars are essential for people to get to jobs, grocery stores, and vaccination centers, but the government did not provide federal aid for car loans during the pandemic. Of course, stimulus checks helped borrowers stave off defaults, and some states stopped redemptions, but providing other arrangements, such as deferrals, was left to the lenders themselves.
There’s no direct support for auto loans, in part because, unlike student loans and mortgages, there isn’t any federal regulation of auto lending, said John Van Alst, an attorney at the National Consumer Law Center, a nonprofit advocating for low-income American. Now that the country is reopening for business, lender accommodations are starting to disappear, and Van Alst said car confiscations among subprime borrowers are on the rise. And when it comes to costly subprime auto loans, “there isn’t a huge margin and the smallest thing can get someone into default,” he said.
At the start of the pandemic, many lenders filled the void left by the government, offering postponements and dropping late fees; As a result, auto loan defaults fell last year to their lowest level in 15 years, said Jonathan Smoke, chief economist at Cox Automotive, a company that provides services to the automotive industry.
However, Credit Acceptance did not offer any such deferrals. The company says it has frozen reporting of borrowers’ credit reports and suspended late fees and collection activities such as phone calls and withdrawals for 90 days for Covid-19 damaged customers. After that, however, the borrowers have to make their monthly payments; If it doesn’t, the lender’s website says, the company can resume redemptions and late fees.
Credit Acceptance was founded in 1972 and is the largest self-contained subprime car lender in the country; it had sales of $ 1.7 billion last year. Since the pandemic began, the company’s stock has risen over 50 percent. Credit Acceptance has granted stock grants to seven top executives valued at an estimated $ 55 million, according to regulatory filings.
Massachusetts Attorney General Maura Healey sued Credit Acceptance last summer, saying her credit and collection practices were predatory and illegal in the state. The company announced Thursday that it had reached a settlement with Healey and will pay $ 27.2 million.
“Loan acceptance granted borrowers high-interest loans that the company knew they couldn’t repay,” Healey told NBC News before the settlement was announced. “What I find predatory about these practices is that they specifically target people at risk, people who may not qualify for regular loans or funding arrangements.”
In the course of announcing the settlement, Credit Acceptance also announced the resignation of its longtime CEO, Brett A. Roberts. In a conference call with investors and analysts on Thursday, Roberts said he was retiring for “personal reasons”. Chief Financial Officer Kenneth Booth, a former director of internal audit, will replace him, the company said.
Credit Acceptance did not immediately respond to a request for comment on the settlement.
Credit Acceptance’s regulatory records show that it is being audited in 43 other states outside of Massachusetts and by the Consumer Finance Protection Bureau (CFPB). A spokeswoman for Credit Acceptance said before the settlement that the company would not actively discuss litigation, but would defend itself vigorously.
Williams isn’t the only borrower unhappy with the loan acceptance. As of March 24, the company had generated over 150 customer complaints on the CFPB website, including complaints about its credit report.
From January 2018 through the middle of last month, the company said CFPB data showed that there were 585 complaints about its loans alone. That made it number 5 on the list, behind Santander Consumer USA, Ally Financial, Wells Fargo and Capital One. all of them much larger companies.
The spokeswoman for credit acceptance said: “With over 1.7 million managed accounts, complaints are extremely rare,” a total of less than 4 per 10,000 customers per year.
In addition to Williams, NBC News spoke to eight other dissatisfied credit acceptance borrowers; their loan records show how costly it is to fund the business.
For example, Williams and her husband bought a 2008 Pontiac with 70,000 miles on it for about $ 18,500. Together they put $ 1,000 in cash and borrowed the rest from Credit Acceptance at 22.9 percent interest. The cost of the car was $ 10,500, the contract shows. During the five-year term of the loan, Williams’s financing cost would add an additional $ 7,140.
The Williamses interest rate of nearly 23 percent is common among borrowers and is well above the average of 17.8 percent subprime borrowers last year, according to Experian.
But the interest rate is only the beginning of a borrower’s expense, according to the Massachusetts lawsuit. Loan acceptance charges a hidden fee that increases loans by 37 to 68 percent for low credit customers. The lawsuit also alleges that loan acceptance required many borrowers to purchase vehicle service contracts, which added an average of $ 2,500 to their loans.
These practices add to the final cost of a vehicle, according to the Massachusetts lawsuit. From 2013 to 2019, the average credit acceptance customer in the state paid about $ 20,000 for a used car, more than two and a half times the cost of the car for the dealer of about $ 7,800.
When customers dropped out, Massachusetts investigators claimed Credit Acceptance’s policy was to call them eight times a day to try to collect money. Massachusetts law only allows two calls for collections per week, the lawsuit said.
In addition to high costs and aggressive collection practices, credit acceptance was also high in the case of redemptions. In a conference call with equity analysts in 2015, Credit Acceptance’s chief treasury officer Doug Busk said the company typically repossesses cars on 35 percent of the loans in its most popular loan program.
No official source tracks the volume of vehicle seizures in the US, so the number is difficult to estimate. But it certainly seems high; According to an estimate by Cox Automotive, only 2.06 percent of auto loans resulted in redemptions in 2015.
The Credit Acceptance spokeswoman declined to provide updated numbers on withdrawals. Of the nine credit acceptance customers surveyed by NBC News, three said their cars had been repossessed; two had applied for bankruptcy protection in part to prevent repossession.
When Credit Acceptance repossesses a car, the borrower must keep paying the amount owed. This may include payments for a vehicle service contract that the borrower can no longer benefit from. While filing for bankruptcy protection helps stop repossession, such a move hurts a consumer’s creditworthiness.
Even as Covid-19 put its borrowers at risk, Credit Acceptance was awarding stock option grants valued at an estimated $ 55 million to seven top executives in late December. Regulatory records show that awards exceeded the number of shares eligible for issuance under the company’s active compensation plan by a quarter of a million shares.
The recipients were Busk, the chief treasurer, who discussed redemptions; Booth, the former CFO and new CEO; Charles A. Pearce, the chief legal officer; Arthur L. Smith, the chief analytics officer; Daniel A. Ulatowski, the chief sales officer; and Jonathan Lum, the chief operating officer.
The men declined an interview through the company spokeswoman.
Scott Vassalluzzo is Chairman of the Compensation Committee of the Credit Acceptance Board and an executive member of Prescott General Partners, an investment firm that is the largest shareholder in Credit Acceptance. He said in a statement, “The options awarded represent 100 percent of the incentive compensation. The Compensation Committee and CEO believe this is a good deal for shareholders and a fair deal for executives, given the composition, experience and track record of the team is.”
Credit Acceptance shareholders will be asked to approve the share plan at their annual meeting later this year.