Massachusetts sues auto lender Credit Acceptance Corp., seeking $120 million in damages

Credit Acceptance Corp., one of the nation’s largest auto lenders to people with low credit scores, was slapped with a lawsuit from Massachusetts on Monday. The suit, which was brought by the office of Massachusetts Attorney General Maura Healey, alleges that the lender defrauded as many as 24,000 borrowers over a six-year period in the state, and seeks as much as $120 million in damages.

“This company made unaffordable and illegal loans to borrowers, causing them to fall into thousands of dollars of debt and even lose their vehicles,” Healey said in a statement. “We are taking a close look at this industry and we will not allow companies to profit by violating our laws and exploiting consumers.”

Shares of the company plunged nearly $73, or 16%, to just under $387 on the news of the lawsuit.  

According to the suit, Credit Acceptance raked in profits on defaulted loans that often left borrowers with damaged credit and owing an average of $9,000, even after their cars had been repossessed. The company’s debt collectors called borrowers who fell behind on payments as frequently as eight times a day, the suit alleges. 

Massachusetts law permits no more than two calls a day, the suit says, alleging that Credit Acceptance violated that law more than 1.5 million times over a six-year period.

“What the suit says is that, soup to nuts, these are some really bad guys,” says Andrew Left, an investor who has been betting that Credit Acceptance’s shares will fall. Left’s firm, Citron Research, put out a report earlier this year alleging that Credit Acceptance was defrauding borrowers.

“They are making loans that people can’t afford, putting them in bankruptcy and then beating them up in court because they know their borrowers often cannot afford a lawyer,” Left said. “The worst thing is they take the cars and still stick the former borrowers with thousands of additional dollars in additional debt.”

Credit Acceptance did not return a request for comment from CBS MoneyWatch for this article.

Last year, the company made 370,000 loans and had a net income of over $650 million.Many of those loans ended up in investment products that are sold off to investors. Credit Acceptance is the nation’s second largest lender –– after Wells Fargo –– to borrowers with credit scores below 530. Credit scores tend to range from 300 to 850.  Credit Acceptance hid from investors how risky the loans were, according to Massachusetts’ suit.

At the heart of the suit is the claim that Credit Acceptance regularly made auto loans to borrowers it knew would never be able to repay those loans. According to the suit, internally the company would rank every loan it made from 0 to 100 based on the company’s assessment of how much of the loan would be repaid with interest. Some loans got ranks in the 50s. The average rank for loans the company made last year was 66, according to the lawsuit.

The suit comes out of an investigation by Massachusetts AG Healey that was started nearly three years ago. The company is also under investigation by New York’s attorney general, as well as the Consumer Financial Protection Bureau.

“I’m just very glad to see a number of attorneys general taking this issue seriously, especially when the company is so notorious for targeting African Americans,” said Aaron Greenspan, an investor who has also bet against Credit Acceptance’s shares, and who first wrote about problems at the company in late 2017. “The complaint sets out a wide array of claims that show how the company’s business model is fundamentally fraudulent.”