Credit Acceptance (CACC) Settles Auto-Loan Lawsuit, To Pay $27.2M

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Credit Acceptance Corporation CACC finally announces the settlement of the lawsuit with the Massachusetts Attorney General. In August 2020, AG Maura Healey filed a lawsuit in Suffolk County Superior Court, claiming that Credit Acceptance violated state consumer protection and debt collection laws and regulations.

It was alleged that Credit Acceptance made unfair and deceptive auto loans to thousands of consumers in Massachusetts, provided investors with false or misleading information regarding auto securities they offered, and engaged in unfair debt-collection practices.

Healey said in a statement, “Thousands of Massachusetts consumers, many of them first-time car buyers, put their faith in CAC to help them with an auto loan, but were instead lured into high-cost loans, fell deeper in debt, and even lost their vehicles.”

Per this lawsuit, since 2013, Credit Acceptance failed to inform investors that the pools of loans that were packaged and securitized were topped off with higher-risk loans despite claiming otherwise to investors.

Moreover, as a violation of state law, the company made high-interest subprime auto loans to Massachusetts borrowers, which it knew that they would not be able to repay.

Because of this, borrowers had to experience ruined credit. They lost vehicles and down payments, and were left with an average debt of $9,000. Also, borrowers were subject to hidden finance charges because of which the company’s loans exceeded the usury rate ceiling of 21%.

Notably, the material terms of the lawsuit had been disclosed in April 2021, according to which, Credit Acceptance has agreed to pay $27.2 million to resolve the claims. However, the auto lender did not admit any wrongdoing.

The $27.2 million will be paid into a trust overseen by an independent trustee, which will then be used in part to provide relief to customers, and debt relief and credit repair to borrowers.

Per Healey’s office, more than 3,000 Massachusetts borrowers will likely be eligible for the relief.

Notably, Healey has been conducting an industry-wide investigation of loan securitization practices in the subprime auto market for a long time now. In 2017, Santander Consumer USA Holdings Inc. SC agreed to pay $25.9 million to resolve a sub-prime auto loan probe by the attorney general.

Our Take

While Credit Acceptance has been witnessing a consistent increase in expenses along with worsening credit quality, which is expected to hamper financials, the company’s revenues are likely to continue to be positively impacted by an increase in finance charges, driven by a rise in demand for consumer loans. Moreover, an improvement in dealer enrollments and active dealers (despite tough competition) is a positive for the company.

Shares of the company have gained 70.6% so far this year compared with 48.1% growth recorded by the industry.

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Currently, Credit Acceptance sports a Zacks Rank #1 (Strong Buy).

A couple of other top-ranked stocks from the finance space are mentioned below.

American National Bankshares Inc. AMNB has witnessed an upward earnings estimate revision of 11.3% for the current year over the past 60 days. Its share price has increased 30.9% so far this year. The company currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Community Trust Bancorp, Inc. CTBI carries a Zacks Rank #2 (Buy) at present. The Zacks Consensus Estimate for its current-year earnings has been revised 9.9% upward over the past 60 days. Its shares have gained 12.3% year to date.