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Credit Acceptance Sued for Deceptive Auto-Lending Practices

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Shares of Credit Acceptance Corporation (CACC - Free Report) lost more than 15% yesterday after a lawsuit was filed against the company in Suffolk Superior Court. Attorney general, Maura Healey, 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.

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

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%.

Credit Acceptance is also said to have taken excessive and illegal measures to collect debt from defaulted borrowers, which included sending faulty notices to borrowers with repossessed vehicles, harassing consumers with unlawfully repetitious collections calls, and overcharging consumers on their deficiencies.
Now, the state is seeking relief for borrowers as well as civil penalties.

Notably, an industry-wide investigation is ongoing to review securitization practices in the subprime auto market.

In May 2020, Santander Consumer USA Holdings Inc. (SC - Free Report) agreed to a settlement of nearly $550 million with a group of attorneys general over malpractices in its subprime auto lending business. The attorneys general represented 33 states and the District of Columbia.

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, improvement in dealer enrollments and active dealers (despite tough competition) is a positive for the company.

Shares of Credit Acceptance have lost 2.8% over the past six months compared with a 15.9% decline of the industry.

Currently, the company carries a Zacks Rank #2 (Buy).

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

ETRADE Financial Corporation (ETFC - Free Report) witnessed an upward earnings estimate revision of 19% for the current year over the past 60 days. Its share price has increased 15.3% over the past three months. It currently carries a Zacks Rank #2.

Interactive Brokers (IBKR - Free Report) witnessed an upward earnings estimate revision of 26.9% for the current year over the past 60 days. Its share price has increased 23.6% over the past three months. It currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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