Credit Acceptance Corporation:  Chopra CFPB Could Target Company Through Ongoing Enforcement Investigation, Rulemaking, Issuing Reports; Experts Expect Increased Cooperation with FTC, State Regulators

With current FTC Commissioner Rohit Chopra set to take over as director of the CFPB, subprime auto finance market stakeholders including Credit Acceptance Corporation (CACC), consumer advocates, and even investors in subprime auto asset backed securities will be following three CFPB efforts.  Those efforts are the ongoing enforcement investigation, potential rulemaking, and the soon-to-be released Bureau data point report on subprime auto lending, according to consumer protection experts and a Capitol Forum analysis of prior CFPB decisions and rulemakings.

Chopra, experts said, is known for his collaborative approach and will likely collaborate with state Attorneys General and former colleagues at the FTC on matters of enforcement included those related to the auto finance sector.  In addition to the CFPB investigation, the company is currently facing a 41 Attorneys General multistate investigation, a separate New York AG investigation, and lawsuits by the AGs in Mississippi and Massachusetts.

The CFPB’s investigation spans practically every aspect of the company’s business previously reported by The Capitol Forum in its years-long coverage of the company including marketing and sales practices; the sale of ancillary products; dealer oversight; loan servicing; and debt collection and repossession practices, according to civil investigative demands the CFPB has issued.

The Bureau is also investigating whether Credit Acceptance “made false or misleading representations to consumers, failed to ensure that borrowers received title to their vehicles, and failed to notify consumers of collections lawsuits filed against them, in manner that is unfair, deceptive, or abusive.

The CFPB investigation, which was supervisory in nature until the first civil investigative demand was issued in April 2019, escalated into an enforcement investigation under former Bureau director Kathy Kraninger.

Credit Acceptance’s business model centers around loans that are generally over 140 percent loan-to-value; include expensive add-on insurance products; have APRs of 21 to 25 percent for five-year terms; and are backed by overpriced, high-mileage cars often in poor condition that have high repair costs, according to a Capitol Forum’s investigation into the company.

Borrowers and their co-signers who are unable to afford the payments are left to cope with excessive debt collection calls, ruined credit, repossession, thousands of dollars of deficiency debt, lawsuits, judgments, and decades of wage garnishment and bank account levies.

Chopra, a strong proponent of enforcement, thinks companies should face real consequences for their actions just like borrowers who are harmed by companies’ practices do. In 2019, Chopra said agencies with wide latitude to regulate an industry should use that power if warranted “to ensure that companies face real consequences for their violations, just as borrowers” who make mistakes or default on loans do.

Beyond a specific enforcement action, Chopra could look to rulemaking to regulate the subprime auto industry at large and releasing informational highlights and reports inform the public, the experts said.

In a May 27, 2020 statement, Chopra specifically wrote about auto lending industry concerns, abuses and the “growing evidence of widespread fraud and deceit, including the same ‘liar loans’ that fueled the last recession.” Chopra recommended that regulators use their rulemaking authority to take “a systemic approach to protecting Americans from auto market abuses.”

Consumer protection experts The Capitol Forum interviewed described Chopra as a talented, smart regulator who thinks deeply and creatively and has the inclination, willingness, and political will to maximize regulatory impact. He researches the issues, gathers facts, issues statements to publicize wrongdoing and seeks to structure enforcement in a way that discourages predatory and misleading practices across an industry, experts said.

Chopra is not afraid to challenge large companies with potentially deceptive practices and will not shy away from naming corporate executives and board members as defendants engaged in alleged wrongdoing, the consumer protection experts said.

Credit Acceptance did not respond to a request for comment.

Escalation of matter from supervisory to enforcement under Kraninger suggests there could be problems under the hood. The life cycle of an enforcement action often begins with an exam conducted by the supervisory team.  If warranted, supervisory staff refers the matter to the enforcement staff.

The enforcement staff will assess a number of factors to determine whether to commence an investigation such as whether there is “a plausible set of facts that, if proven, would amount to a violation of one or more federal consumer financial laws,” according to a CFPB webpage.

A Petition to Modify or Set Aside Civil Investigative Demand filed by Credit Acceptance indicates that the company was initially subject to the supervisory process which then escalated into enforcement.

Enforcement staff determined to open an investigation which began with an April 2019 civil investigative demand (CID).  “Quite simply, given that the Company had worked cooperatively with the CFPB and fully embraced the supervisory process, the issuance of a CID, and the Enforcement Staff’s refusal to explain what had prompted the inquiry were in direct opposition to the Director’s stated policy,” lawyers for the company wrote in the Petition.

For a full timeline of the CFPB’s investigation see the Appendix below.

It is not known what prompted the CFPB to escalate from the supervisory process to an investigation by enforcement but, significantly, the shift occurred under industry friendly Kraninger under whom the Bureau lessened regulatory efforts on businesses.

Kraninger preferred settling matters using the confidential supervisory process as opposed to a public enforcement action.  She explained at a House hearing (time stamp 2:39:05) one month before the April 2019 CID was issued to Credit Acceptance, “Where I sit, the enforcement tool is one that is not the first tool we use for entities that are seeking to comply…Where enforcement is most powerful is for those entities who are not seeking to comply and who are bad actors in the system and are engaged in unfair practices. They are the ones that enforcement, under my leadership, will go after.”

The Bureau is investigating many of the company’s practices. Many of Credit Acceptance’s business practices that are now the subject of the Bureau’s investigation were previously reported by The Capitol Forum such as how the company’s proprietary lending risk assessment tool, Credit Approval Program System (CAPS), drives dealer pricing, encourages dealers to markup the lowest value vehicles by the highest percentage and incentives dealers to fabricate down payment amounts and deceptively market ancillary products.

Since the bureau does not have jurisdiction over auto dealers, it will attempt to show how Credit Acceptance’s business practices directly influences and incentivizes dealers, Kathleen Engel, a research professor and expert on predatory lending who served on the CFPB’s Consumer Advisory Board (CAB) told The Capitol Forum in an interview.  Engel, like other experts The Capitol Forum spoke with, talked in general terms about the CFPB’s authority to regulate subprime auto finance not specifically related to Credit Acceptance.

According to two of the CIDs issued to the company, the CFPB is gathering information about the extent of control Credit Acceptance has over the sale and lending process including the setting of loan terms.

The CAPS system allows dealers to enter customer data and “to quickly surmise which financing packages are financially attractive the dealer may then steer the customer toward purchasing a vehicle which may be financed on terms that will be most profitable to the dealer,” according to the CAPS patent.  Through this process CAPS encourages dealers to steer individual customers toward purchasing a specific vehicle with the most profitable financing terms.

The Bureau is also probing how much the company ferrets out improper practices by dealer partners and how the company is monitoring dealers; overseeing dealer compliance; and how much the company is aware of and condones the inflation of vehicle prices, according to the CIDs.

Other practices under scrutiny are Credit Acceptance’s dealer recommendations for selling and marketing the company’s financing and ancillary guaranteed asset protection (GAP) insurance and vehicle service contracts (VSC).  At least two CIDs contain questions and requests for documents related to the company’s GAP and VSC practices including sales and compensation, marketing, and penetration rates.

The Bureau is increasingly interested in auto finance companies’ ancillary product programs.  Attorneys from the CFPB and FTC spoke the 2017 Auto Finance Risk and Compliance Summit and pointed out that both agencies are interested in how ancillary products are marketed and sold; if customers are misled to believe the products are required; and the percentage of customers buying the products which, if high, would raise questions, according to a Ballard Spahr blog post.  The Bureau is also interested in incentive and compensation programs tied to the sale and marketing of add-on products and the oversight of third-party service providers that perform marketing or other functions related to add-on products.

At least two of the CIDs contain multi-part questions and document requests related to other practices reported by The Capitol Forum such as problematic loan servicing, debt collection abuses including excessive collection calls, heavy reliance on default judgements and wage garnishment, and credit reporting errors and lack of response to credit report disputes.

In addition, the CFPB is trying to determine if the company “failed to notify consumers of collections lawsuits filed against them, in a manner that is unfair, deceptive, or abusive,” according to the Bureau’s notification of purpose in at least two of the CIDs.

Timing and potential outcomes of enforcement action. Supervision, unlike enforcement, is often a way for matters to be resolved quickly, quietly and confidentially.  The Bureau “can go in and basically do inspections of books and records, talk to employees, poke around,” said Adam Levitin, professor of law at Georgetown University where he teaches courses in financial regulation and contracts.  Levitin also previously served on the CFPB CAB.

Engel said if a CFPB supervisory exam uncovers areas of noncompliance with consumer protection law, the institution “can enter into different types of agreements with CFPB so that the entity elevates its practices to a level that would satisfy the CFPB.”

“There is no fine,” Levitin said.  “The only hint you will see of it is if the CFPB releases supervisory highlights which has a rather general description of what the problematic practice was in the industry.”

Supervision, Engel opined, “is the easiest one to exercise but the remedies are weaker” and it only impacts the individual firm.

“Enforcement is about using the tool chest of laws enforceable by the CFPB to pursue claims against financial institutions CFPB alleges are breaking the law,” Engel said.  “For example, the CFPB has the authority to pursue claims of unfair, abusive or deceptive acts and practices against auto lenders,” Engel added.

Levitin said, “Most enforcement actions result in settlements.”

Where enforcement hits a snag is when there is a defendant who is not willing to come to the settlement table.  Levitin offered some reasons a defendant would not settle.  “Maybe the defendant thinks they’ve done nothing wrong and believes in their ability to defend the case.  But more likely, the defendant and the CFPB just do not have an area that they can agree on for a settlement.  Often it is not so much the dollar amount in those cases.  Rather it is about what kind of injunctive relief the CFPB wants.”  When designing injunctive relief, the Bureau seeks to stop unlawful conduct and prevent future violations.

Enforcement staff might insist that the defendant cease certain business practices.  If that poses a fundamental threat to the defendant’s business model, there might not be room for a settlement, explained Levitin.

When settlement negotiations fail, enforcement staff takes the case to court.  If CFPB ends up in court with Credit Acceptance, the company is likely to demand—as it has in the lawsuits filed by the Mississippi and Massachusetts Attorneys General—redactions, confidentiality and protective orders in regard to the Bureau’s allegations in the complaint and other court documents. This will likely create tension with Chopra’s interest in increased transparency related to regulatory efforts and matters of consumer finance.

Contested enforcement litigation typically takes years to wind through the court system. But, depending on where the CFPB is in its investigation and Chopra’s assessment of the investigatory effort and results, the Bureau could bring an enforcement action fairly quickly.

Levitin explained that, compared to rulemaking, enforcement actions are “something that the CFPB can bring relatively quickly.”

CFPB’s rulemaking process. Rulemaking is the hardest authority to exercise and is time consuming, according to Engel, because the CFPB must first determine if rulemaking is needed, conduct research, and assemble a factual record to support the rulemaking. “These steps will be especially true under Chopra because he is a very thorough and systematic leader,” said Engel.

The rulemaking process requires the CFPB to solicit comments from stakeholders including governmental entities, private citizens, activist groups and industry. Then, the Bureau goes through every comment and must address the arguments and evidence that is produced to determine how to construct the regulation.

The CFPB could put forth auto lending rules that would negatively affect the Credit Acceptance’s business model.

CFPB has previously promulgated ability to pay rules which if required for auto loans would likely negatively affect the company’s business model. In December, the Capitol Forum reported on how an ability to pay requirement would pose a threat to Credit Acceptance’s business model.

Under Bureau’s first director Richard Cordray, the CFPB promulgated an ability to pay rule for credit cards, mortgages and payday, small dollar and vehicle title loans.  Later, Kraninger revoked the ability to pay mandatory underwriting provisions for payday, small dollar and title loans.

Importantly, the Bureau’s ability to pay rules require lenders to not just consider income and employment but also to account for reasonable monthly expenses—which Credit Acceptance does not do when underwriting loans. Rather than a debt to income ratio, Credit Acceptance uses a payment to income ratio allowing monthly auto loan payments up to 25 percent of a borrower’s income, former employees told The Capitol Forum.

Consumer financial law experts expect that the company will aggressively fight and litigate against any regulator who attempts to impose mandatory underwriting standards regarding ability to pay.

The CFPB can regulate ability to pay using various regulatory tools including issuing guidance to a company after a supervisory exam; enforcement by injunctive relief provisions in a consent decree or court ordered judgment; and rulemaking.

“If CFPB went through a company’s book and saw a large portion of a company’s loan portfolio was failing, then it is pretty clear what they are doing,” said Ira Rheingold, executive director of the National Consumers Advocacy Association in an interview with The Capitol Forum. That raises questions Reinghold said, “Why are these loans being made?”

Levitin pointed out, “The CFPB would start off asking, ‘Is there evidence that car finance companies are not taking into account people’s ability to pay their loans?’ And if there is, ‘Is it appropriate to require an ability to pay regulation?’”

The CFPB may revitalize plans to propose separate collections rule to govern creditors.  Going forward, experts said that CFPB could extend the Bureau’s debt collection rule to creditors like Credit Acceptance who collect on their own debt.

The CFPB under Cordray had outlined plans—scuttled during the Trump administration—to propose a separate collection rule to govern “creditors that collect their own debts,” according to Cordray’s remarks at a 2017 CAB meeting.

And Chopra is supportive of revitalizing this effort, according to recent remarks. “Several years ago, when the CFPB launched a rulemaking on third-party debt collection, the agency indicated that it planned to address first-party debt collection on a separate track,” he said. “Despite support for this approach, it never did.”

CFPB plans to issue a report on subprime auto lending. In addition to supervision, enforcement and rulemaking, the Bureau also has the statutory authority to conduct research and publish results and to collect, use and report on consumer complaints to inform its work and educate the public, according to former CFPB director Richard Cordray’s comments during a February 2 Ballard Spahr webinar.

In fact, highlighting its interest in the industry overall, the Bureau’s Office of Research plans to issue a data point report on subprime auto lending in the first half of 2021 according to semi-annual report issued last fall. The Bureau’s data point reports provide an evidence-based perspective on consumer financial markets, consumer behavior, and regulations to inform the public discourse.

Chopra uniquely positioned to collaborate with the FTC and state Attorneys General which, unlike CFPB, have jurisdiction to regulate auto dealers. CFPB has no authority over auto dealers because the Dodd Frank Act—which enabled the Bureau to define auto finance companies as larger participants subject to CFPB oversight—granted a special exemption to auto dealers.

However, the exemption authorized the FTC to “write rules to protect car buyers and honest auto dealers,” Chopra wrote in May of last year in a statement in which he discussed unused FTC rulemaking in the context “growing evidence of widespread fraud and deceit” in the auto dealer industry.

Despite the prohibition on the Bureau’s ability to regulate auto dealers, Chopra, who since 2018 has served as an FTC commissioner and who is known for his collaborative and creative regulatory approach, is likely to bring a number of federal and state agencies together—including FTC—to work toward making structural changes in industries of concern, according to experts.

Engel noted, “What we are seeing out in the market is that the lenders and the dealers are more intertwined than they have been in the past.”

“The FTC has a lot of rulemaking authority, but they have chosen not to use it,” said Rheingold.

“The fact that Rohit Chopra comes from the FTC is a good thing. He understands the scope of what the FTC and do and now he can see what the CFPB can do. I think there is an opportunity for those agencies to partner and work in concert when we talk about car dealers and auto finance companies like Credit Acceptance.”

“CFPB could also work with states in terms of dealer licensing,” he added.

And, the CFPB has an established history of coordinating investigation and enforcement efforts with state Attorneys General.

APPENDIX

CFPB investigation timeline.  The timeline of CFPB’s enforcement action is detailed in the chart below.

Source: Credit Acceptance 8-K filings; Petition to Modify or Set Aside Civil Investigative Demand.