Credit Acceptance Corp., a major subprime auto-finance company, has agreed to a $710 million settlement with 41 states over allegations that it trapped low-income car buyers in high-risk loans designed to fail. The agreement, led by New Jersey, follows the Consumer Financial Protection Bureau’s decision under the Trump administration to withdraw from a joint lawsuit filed in 2023 with New York state. With federal enforcement stalled, state attorneys general stepped in to fill the void.
Background of the Investigation
State investigations into Credit Acceptance have spanned nearly a decade. The states alleged that while the Southfield, Michigan-based lender used a proprietary scoring system to predict loan collection rates, it approved loans for borrowers that its own data suggested were unable to repay. According to the states, in any given year, all Credit Acceptance contracts with borrowers whose scores were in the lowest 20% “have been set up to fail loans.”
The consent order announced Thursday states that between 25% to 30% of Credit Acceptance’s loans are 90 days past due and in default within 12 months of origination. Within three years, 70% of the company’s borrowers are in default, and 40% have had their vehicles repossessed, the states allege.
Settlement Terms
The settlement includes direct consumer restitution, with $60 million in cash to be distributed to consumers who received particularly high-risk loans. A much larger sum will go toward debt relief. Outstanding loan balances will be erased for Credit Acceptance borrowers whose vehicles were repossessed between November 2015 and November 2025, yielding $388 million in debt relief. Another $246 million in debt relief will go to current borrowers to pay off their remaining loans. In addition, Credit Acceptance will pay $15 million directly to participating state attorneys general.
New Jersey Attorney General Jennifer Davenport said the company originated loans that borrowers could not afford. “Access to a car helps families get to work, take their kids to school, and build financial stability — but when car payments become unaffordable, that stability turns into a spiral of debt and financial distress,” Davenport said in a press release.
The company said it will pay $60 million to a consumer relief fund and $15.5 million to the participating attorneys general for their investigation, and provide debt relief “in the form of a waiver of all outstanding balances to certain customers.” State participating attorneys general will administer the consumer relief fund. Credit Acceptance, a publicly-traded company, will not record additional charges in its financial statements.
“This resolution provides certainty for our business, our dealer partners and the customers we serve,” Vinayak Hegde, the CEO of Credit Acceptance, said in a press release. “We believe the provisions we agreed to are constructive, customer-focused and consistent with the direction of regulatory expectations in our industry.” Hegde, a former chief marketing officer at T-Mobile and Airbnb, became CEO just a year ago replacing former CEO Kenneth Booth. Hegde had been on the board since 2021. “Importantly, the resolution allows us to keep our full attention on helping consumers who may have limited financing options obtain access to reliable transportation and the opportunity to improve their financial lives over time,” he said in the release.
Allegations of Predatory Practices
The lawsuit by state regulators also targeted the auto dealers’ practice of selling “add-on” products. Regulators alleged that Credit Acceptance’s compensation structures had the effect of incentivizing dealerships to add expensive products, such as vehicle-service contracts and guaranteed asset protection insurance, to the loans. Some dealerships allegedly did so without the consent or knowledge of the borrower.
“Predatory and deceptive lending practices are especially harmful when they target consumers who can least afford the consequences,” said Christopher Peterson, acting director of New Jersey’s Division of Consumer Affairs.
Operating Restrictions and Reforms
Beyond the financial penalties, the consent agreement imposes strict operating restrictions to reform the company’s subprime lending model. Specifically, for recent risky loans that quickly failed, the company must offer qualifying consumers a 95% debt reduction and agree not to file collection lawsuits against them. Further, the company is required to cap vehicle prices at 109% of their retail book value for certain high-risk borrowers. Credit Acceptance must also establish prepurchase risk disclosures, as well as monitor dealer networks and simplify the cancellation process for certain add-on products.
As for its dealers, the lender must create rules preventing partner dealerships from inflating vehicle prices based on a consumer’s credit score or charging above advertised prices.
The company’s stock price fell 1.8% on Thursday.