July 29, 2021

N.Y. attorney general threatens subprime car lender with Martin Act violations

Credit Acceptance Corp., a big lender to car buyers with poor credit histories, is being investigated by the New York attorney general’s office for violations of the Martin Act, a state statute considered the broadest and most potent securities law in the country.

While Michigan-based Credit Acceptance faces numerous investigations from state and federal authorities, Martin Act charges could be especially costly for the company to resolve. Unlike most anti-fraud laws, it doesn’t require authorities to prove bad intent or that there were victims of a company’s alleged illegal activity. A Wall Street Journal editorial once called the Martin Act “the worst law in America.”

Credit Acceptance, which didn’t reply to a request for comment, is cooperating with the inquiry. “We are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this investigation,” the company said in its latest annual report.

A spokesman for Attorney General Letitia James declined to comment. James is widely seen as a possible successor to New York Gov. Andrew Cuomo.

It wouldn’t be the first time an attorney general used the Martin Act as a ticket to Albany. Nearly two decades ago former Attorney General Eliot Spitzer dusted off the century-old law to force Wall Street firms to cough up big sums for misleading investors after the dot-com bubble popped.

Credit Acceptance, a tempting target for regulators, said attorneys general in New Jersey, Maryland and Mississippi have served subpoenas. Last year the Massachusetts attorney general sued it, alleging fraud. The federal Consumer Financial Protection Bureau also is investigating the company after receiving more than 1,400 complaints about it in the past three years.

The scrutiny comes as regulators feel more emboldened in a Biden administration.

“There’s a new sheriff in town,” said Ira Rheingold, executive director at the National Association of Consumer Advocates.

Credit Acceptance isn’t a household name, but more than 12,000 car dealers nationwide use it to write mostly used-car loans for shoppers who struggle to repay debts. Credit Acceptance charges high interest rates and often won’t hesitate to seize vehicles when borrowers fall behind on payments.  

Subprime auto lenders frequently go bust, but Credit Acceptance has been around since 1972. Founder Donald Foss owned a 5 percent stake in GameStop before it became a Reddit favorite. He sold all of his 3.5 million shares before the frenzy, according to a regulatory filing.

Last year the Credit Acceptance’s adjusted net income rose slightly to $683 million while revenue reached $1.7 billion – twice 2015’s amount.

Over the years investigators typically have examined whether Credit Acceptance’s lending or repossession practices violate local consumer-protection laws.

“Their contracts are not transparent and they play this bait-and-switch game promising borrowers they can refinance, but that’s often not true,” said Shanna Tallarico, a consumer debt attorney with the New York Legal Assistance Group.

More recently, authorities have begun looking into whether Credit Acceptance made misrepresentations to institutional investors who purchased securities backed by the firm’s car loans. The company has securitized nearly $5 billion worth of loans in the past three years, according to its annual report. That’s where the Martin Act would likely apply.

In the past the company might have seen penalties levied by regulators as a cost of doing business, Rheingold said.

“Their cost-benefit analysis will have to change because so many parties are going after them,” he said. “They are the bull’s-eye for a lot of enforcement agencies.”

Apart from forcing Credit Acceptance to pay hefty fines, Tallarico hopes regulators will require the company to write loans with understandable terms that don’t shoulder borrowers with so much debt.

“Most people are sensitive about their credit,” she said. “If they were given a clear contract and charged a reasonable rate, they could repay their loans.”