In late 2018, Oklahoma resident Becky Perrin was looking for a used car to run errands and go to the doctor when she found a Chevrolet Camaro 2014 at a car dealership.
To buy the sedan, Perrin, a retired nurse that at that time I had 28 years old and recovering from cancer, he asked the dealer to take care of the financing, as most Americans do when getting a car loan. The dealership, according to the lawsuit Perrin filed in the lawsuit he filed later, ultimately obtained the loan through Credit Acceptance Corporation, a Michigan-based company that primarily provides services to consumers with low credit scores.
However, the cost of the loan, which included an annual percentage rate of 21% and monthly payments of $388, turned out to be more than she agreed to and could afford, and Perrin quickly fell behind on her payments. Shortly thereafter, Credit Acceptance repossessed her Camaro, forcing her to rely on friends and family to get around.
Perrin’s story is not the only one, says Kathi Rawls, the attorney who represented her in the recent judgment against Credit Acceptance.
Rawls declined to comment specifically on Perrin’s case, for which she settled in October. However, she says, “Lenders usually know their customers won’t be able to repay the loans they give them, but they let them buy the car at the dealership anyway.” According to her, this is so because lenders know that even when borrowers do not pay, they can make money in other ways.
In fact, both Credit Acceptance and Santander Consumer USA, which is based in Texas and is its main competitor in the subprime auto loan industry, have been charged by two attorneys general in in recent years for violating laws prohibiting “unfair or deceptive” business practices by making loans they know will fail, and exposing borrowers to unnecessary high levels of risk.
In addition, even when a borrower stops paying Santander and Credit Acceptance, they still manage to obtain benefits, according to the state attorneys general of Mississippi and Massachusetts, using different tools to “squeeze as much money as possible from the debtor borrowers”, according to one of them. (Santander and Credit Acceptance settled in both cases, neither admitting nor denying the wrongdoing).
This, according to a Consumer Reports analysis of statutory filings and legal documents, sometimes occurs when lenders work with dealers to raise the price of the cars they sell to low-income borrowers more than they do with customers with better credit, or sell them expensive cars they can’t afford. Lenders are also accused of structuring loans and their deals with dealers in ways that virtually guarantee a profit even if borrowers default, attorneys general say.
And when borrowers fall behind, As is often the case, lenders work aggressively to collect debts through wage and asset garnishments, according to allegations in documents reviewed by Consumer Reports.
“Some lenders appear to have business models where a certain level of garnishment is expected, or even a certain level of garnishment is desired,” says Pamela Foohey, a professor at Benjamin N. Cardozo School of Law in New York City, who has published several studies on loans for automobiles.
In the third quarter of 2021, Credit Acceptance and Santander reported net earnings of $250 million and $763 million, respectively, in the previous three months.
In other words, giving bad loans is good business.
But it is a dangerous model for consumers with low credit scores. Sky-high interest rates, with clauses that are often extended by 72 months or more and monthly payments that consume a significant part of your income, encourage default.
And when this happens, life turns upside down. When a person’s car, wages, and tax refunds are repossessed, a vicious cycle begins that makes it difficult to rebuild credit, keep a job, or pay rent or other expenses.
Santander declined to comment on specific questions from Consumer Reports related to the allegations, but said in a statement that it is a “responsible lender” operating in a highly regulated environment.
“We treat our clients like people, we strive to find sustainable financial solutions that work for a wide range of incomes and credit scores,” said Laurie Kight, company spokesperson. “If customers fall behind on payments, we try to give them options to help them keep the vehicle, including loan modifications and payment extensions, and repossession is always the last resort.”
Credit Acceptance also declined to comment on specific questions related to ongoing court proceedings, citing company policy.
“Credit Acceptance has been in the business for almost 67 years because through auto dealers across the country we offer financing programs that allow consumers with poor credit or no credit to purchase vehicles and obtain or repossess your credit,” the company said in a statement to CR.
“We are pleased to have resolved the indictments of the Massachusetts and Mississippi Attorneys General in 2021, and we continue to proudly serve those customers who find themselves in these situations through our financial programs.”
Josh Lauer, Associate Professor of Communications at the University of New Hampshire and author of numerous articles on the credit scoring industry, points to the development of credit scores, something that has a lot to do with the approval of auto loans, as a double-edged sword. As a result of the credit score, more people can access loans, but for some, loans can be a financial disaster.
“It helps unethical lenders identify vulnerable borrowers, and then take advantage of them,” says Lauer. “Most lenders are supposed to be looking to make money but they do it ethically.”
Not so risky after all
The Lenders who make loans to consumers like Perrin tend to run their business model as if it were a big gamble: They take a chance on high-risk borrowers, typically those whose scores are below 650, who would not otherwise be able to obtain any loans.
According to them, it is riskier to lend money to these borrowers than to people with a high credit level, which justifies the high interest rates they charge.
But a September study 2021 by the Consumer Financial Protection Bureau undermines that argument.
According to this analysis, borrowers who obtained loans from auto finance companies and had low credit levels were more likely to receive higher interest rates on average and to have more problems keeping up with the payments than consumers who had obtained loans from banks or financial institutions.
However, the CFPB analysis suggests that the reason for the high rate of default on payments by poor borrowers may not have been the fact that they represented a high risk but that car finance companies charged them high interest rates, around 013%, on average, compared to 10% for those who had the security bank finance.
In fact, after controlling for multiple variables, the agency estimates that a “buy here pay here” lender (a kind of dealership that offers loans directly to customers) charged the standard borrower with a credit score of at least 560 a higher interest rate than a bank would charge, even though it represents the same default risk for both lenders.
“It is completely understandable that lenders want to charge higher rates to riskier clients, but this report suggests that subprime lenders are charged much more than what they are guaranteed ”, says Chuck Bell, financial policy attorney for Consumer Reports.
Guaranteed quick profits
The business model of lenders like Credit Acceptance and Santander may be less risky than it seems for another reason: They supposedly make deals with car dealers so that their Profits are protected even when borrowers default.
That’s how they do it, according to court records reviewed by Consumer Reports.
At least the 67% of car financing is done through dealers. However, the loans come from lenders like Credit Acceptance and Santander, who pay dealers a fee to broker the deal.
Lenders say the system works for both dealers and car buyers.
“They are incentivized to make clients believe that they will succeed,” said Douglas Busk, former vice president and chief treasurer of Credit Acceptance, in a statement made in 2017.
But lenders usually design agreements so that their profits are protected at all costs, depending on the lawsuits filed between 2015 and 2020 by attorneys general of the different states against Credit Acceptance and Santander. Specifically, the attorneys general ensured that the riskier a customer is to the lender, the lower the rate the dealer will pay.
This ensures that the company’s profits “remain the same, no matter how much it is expected to charge, whether it is a lot or a little,” according to a case filed by Massachusetts Attorney General Maura Healey v. Credit Acceptance. In fact, even accounting for borrowers’ defaults, Healey says the company would make more than $3 in profit,84 of the average number of loans made to Massachusetts borrowers between 2013 and 2019.
Credit Acceptance did not admit or deny the illegal actions of the lawsuit, for which an agreement was reached in September of 2021.
The high interest rates and high monthly payments that loans usually have can also help lenders quickly recover their money, even when borrowers default.
For example, in the Mississippi lawsuit against Santander, the state attorney general stated that the company set interest rates high enough to guarantee profits even when customers made only 3-6 monthly payments. The state’s lawsuit also refers to the company’s internal communication in which Santander’s vice president, whose name is not mentioned, told staff that “the company makes money even when customers stop paying,” and another employee said that a pres tamo “made sense” even when the customer was expected to only make payments for a year’s worth.
The Mississippi Attorney General denied receiving a public records request from Consumer Reports requesting copies of the interviews, claiming they were protected by a protective order.
Car and wage repossession
Lenders have another way to balance their accounts: When borrowers default, they can repossess and resell the cars, or garnish wages or tax refunds.
In the case of Credit Acceptance, the importance of these strategies appears to be reflected in the composition of its workforce, according to a Mississippi lawsuit against the company. Almost half of its staff is dedicated to managing and collecting loans, while only the 28% grants loans.
For Santander, each year the company repossesses around 15% of automobiles with pending loans, according to the analysis of the annual reports of public access corresponding to the period covered between and 2020. Credit Acceptance has even higher garnishment rates, approximately 35%, according to statements made by Busk, vice president and chief treasurer at the time, to stock market analysts at 2015. By comparison, Ford auto loan lenders have a foreclosure rate of about 1%.
After repossessing the vehicles, lenders try to “put it back on the market”, which usually means reselling it at auction. Santander seized more than 1.15 million cars in the last 5 years, spending around $1,01 in each resale agreement, based on the company’s financial filings .
And if the lender can’t resell the vehicles to pay off the loan balance, they can go to court to garnish the lender’s wages or tax refunds.
An example cited in Mississippi v. Credit Acceptance illustrates how consumers can remain in debt for years.
The state attorney general cited a resident who in 1997 financed a car with a loan for an approximate amount of $6,500 from Credit Acceptance whose interest rate interest was 10%.
When the person stopped paying, Credit Acceptance took the lender to court to recover what was still owed. The court agreed with the lender. Adding the attorney’s fees, the consumer owed $5,515.
Even for 2013, the interest on the remaining balance had reached a total of $11,475, almost double the original loan amount, according to the Mississippi attorney general.
In fact, the company relies heavily on wage garnishments, according to research conducted in 2018 by the Jalopnik car news website. The investigation, which reviewed tens of thousands of foreclosure cases conducted in the city of Detroit, found that more than 9,000 had been going on for over a decade. Approximately 2,80 of these cases had extended for more than 20 years.
“Auto finance companies that engage in risky and unsafe loans defraud their customers and their community,” says Consumer Report’s Bell. “Who is going to crack down on car lenders who overcharge their loans and set borrowers up for default?”
More expensive cars for low-income borrowers low credit
Lenders’ efforts to make money off of low credit customers can sometimes begin before borrowers even buy a car.
In the case of Credit Acceptance, the lender accomplishes this by working with its partner dealer to set higher margins on cars sold to customers with poor credit than to customers with good credit, the lawsuit alleges.
They do it as follows.
Used car dealers often purchase cars at auctions or trade-ins with their customers. According to documents filed in a lawsuit filed in 2020 by investors, Credit Acceptance tells dealers to sell those cars at high prices when they enter the prices for company loans, pointing out that prices can always be lowered during the sale process, if necessary.
It appears that cost reduction is much more likely for high-credit clients than for low-credit clients. In a review of loan-related information, the Massachusetts Attorney General found that the original cost of vehicles sold to customers with good credit averaged $7,284 and the cost paid by the borrowers was $10 ,000, that is to say that there was an overprice of 37%. But in the case of clients with a low credit level, the surcharge was 68%, the price was $6,533 to $,1997.
Setting such high values for cars also hurts consumers in another way, the manager stated in the lawsuit filed by investors in 2019: “Customers were often unable to refinance their vehicles or obtain a better interest rate because the true value of the vehicle was much lower than the amount the owner owed.”
The trial is in process. Credit Acceptance denied the allegations.
The damage
All of these measures can help lenders protect their finances, often at the expense of borrowers .
For example, in some cases, high interest rates given to borrowers force them to spend a third of their monthly income or more on auto loans, according to the Mississippi lawsuit against Santander. Loan experts advise consumers not to spend more than 10% of your monthly income on car payments.
In one of the examples of lawsuit, a low-income consumer purchased a Nissan Altima sedan with a six-year loan from Santander that included a monthly payment of $445 and an interest rate of 21%. Her monthly income at that time was barely $1, 200.
“She was concerned that the monthly payments were too high,” the attorney general said in her lawsuit, “but she urgently needed the car and was convinced she could meet the payments.”
This was too optimistic. She fell behind on payments, which allegedly caused Santander to tirelessly call her on the phone to collect from her. Ultimately, she filed for bankruptcy to avoid having her car repossessed.
“These consumers can barely cover the monthly payments and the cost of living, and do not have savings for the additional unexpected expenses that are common in people’s lives, for example, medical emergencies, detailed in the lawsuit.
The witnesses cited in the investors’ trial against Credit Acceptance stated that the lender approved loans daily that consumed more than 25% of the borrower’s income, despite the internal policies of the company.
Credit Acceptance did “the bare minimum” to investigate the financial situation of consumers, the lawsuit states, according to the testimony of another employee who worked for the lender for more than a decade, until the fall of 2020.
The clients, according to the employee, were destined to fail.
What to do
Get a loan for a car can be a daunting task. Consumer financing experts widely recommend that it’s best to try to obtain financing through a bank or finance company beforehand, because lower interest rates are likely to apply. If you go to a dealership, negotiate not only the price of the car, but also the terms of the loan offer.
If you start having trouble paying off your car loan, John Van Alts, Attorney and auto loan expert at the National Center for Consumer Rights recommends the following steps:
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You should continue to make standard car insurance payments, while also trying to pay off any “supplemental” insurance you purchased from the lender, plus any additional expenses, such as service plans.
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Try to get a better deal with the lender.
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Sell the vehicle before it is repossessed. You will have to pay what you owe but at least you will recover a part.
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Please note that repossessors cannot illegally enter a locked garage to recover a vehicle. But never try to stop your car from being taken by using force, because it can be dangerous. If the garnishee uses force, call the police and contact an attorney.
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If your car is repossessed, try to recover the belongings you have left inside it. Creditors can’t keep them as collateral damage, so file a claim over the phone and in writing immediately to return everything found in the car, detailing each item. Also remember to immediately cancel the insurance and the additional programs that you have contracted, and try to recover the payments made after the repossession of the car.
If you need a car, you can go to programs that exist in the United States to help low-income consumers obtain reliable cars at lower interest rates.
Soon there could be more regulatory measures. Federal regulators, in particular, have been investigating Credit Acceptance for years, and in June the Consumer Financial Protection Bureau sought additional information about the terms on which the company makes loans.
However, business has been good for Santander and Credit Acceptance. In the time it took the Massachusetts attorney general to investigate and settle with Credit Acceptance, over six and a half years, the company’s stock price more than quadrupled. Santander has also done well.
Last summer, during a telephone call with analysts to discuss the results of the company’s business during the second quarter of 2021, Mahesh Aditya, Chairman and CEO of Santander, bragged about the company’s situation during the COVID-pandemic 18. It was the most profitable quarter in hi company history.
Aditya pointed to the low supply and the increase in the price of used cars as the main reasons for the company’s record in that quarter. However, part of the company’s success is based on a number that was found in the company’s financial report: 84,249, and which corresponds to the total number of vehicles that Santander repossessed from its customers that year.
Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2022, Consumer Reports, Inc.
Consumer Reports has no financial relationship with the advertisers on this site. Consumer Reports is an independent, nonprofit organization that works with consumers to create a fair, safe, and healthy world. CR does not endorse products or services and does not accept advertising. Copyright © 2022, Consumer Reports, Inc.
2022