Early last week, Attorney General Maura Healey filed a lawsuit against Credit Acceptance Corporation (“CAC”), a credit lender that specializes in auto loans. The complaint alleged that CAC had provided borrowers with high-interest subprime auto loans which the company knew the borrowers would be unable to repay. After borrowers defaulted, CAC aggressively pursued them for repayment, hailing them with collections calls and overcharging them for their deficiencies. The company then misled investors by packaging these high-risk loans along with other loans into asset-backed securities, which CAC misrepresented as only containing high-quality loans. As a consequence of CAC’s activities, thousands of consumers have been left in financial ruin. Borrowers of these loans risk lowering their credit score, losing their automobile, and facing accumulating fees if they default.
CAC is not the only company in the subprime auto market to be recently accused of deceitful and predatory behavior. Earlier this year, Santander agreed to a $550 million settlement with 33 states and the District of Columbia after engaging in similar conduct, approving high-cost auto loans for consumers with subprime credit. Last year, Exeter Finance paid $6 million as part of settlements with Massachusetts and Delaware based on their subprime auto loan practices as well. These lawsuits illustrate a growing and concerning trend in the auto finance industry– more and more credit lenders have been willing to offer loans without engaging in reasonable underwriting practices.
The fact that credit lenders are willing to loosen their underwriting standards and then securitize the resulting loans is especially troubling, considering that similar practices in the subprime mortgage industry spurred a global financial crisis a decade ago. In fact, the auto loan industry today is facing many of the same problems that the mortgage industry faced leading up to the financial crisis. Partly as a result of the coronavirus pandemic, auto loans have experienced a sharp rise in default rates. A substantial portion of these defaults have come from subprime borrowers. These signs indicate that automobile asset-backed securities may very well be the new generation of RMBS.
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