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Market Extra: Credit Acceptance shares tumble 12% after regulators sue, claim illegal subprime auto lending practices

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Shares of subprime auto giant Credit Acceptance Corp
CACC,
-10.07%

tumbled about 12% on Wednesday after New York Attorney General Letitia James and a key U.S. consumer watchdog sued the lender, saying it has been illegally tricking low-income borrowers into high-cost car loans that lead to a debt spiral.

The lawsuit aims to force Credit Acceptance to abandon any illegal lending tactics, to reimburse harmed consumers and to extract penalties and the return of “wrongfully earned gains,” according to a statement from the Consumer Financial Protection Bureau, the U.S. watchdog involved in lawsuit.

Credit Acceptance is one of the nation’s biggest publicly traded auto lenders, involved in financing more than $4.9 billion in auto loans in 2020 alone, according to the complaint. It has been a frequent issuer of asset-backed bonds tied to subprime car loans, where BB-rated bonds lately promise yields as high as 11%, according to FinSight data.

Regulators have been closely monitoring subprime auto lenders for potentially abusive practices since the 2007-2008 global financial crisis, which was fueled partially by an explosion in subprime mortgage lending. The ensuing foreclosure crisis led to the creation of the Consumer Financial Protection Bureau.

The bureau since has extracted billions in fines from lenders in the near $1.5 trillion U.S. auto-loan market, while recently warning it will be monitoring lenders engaging in illegal car repossessions after used-car prices soared in the pandemic.

See: Consumer watchdog fires warning shot to lenders over abusive auto repos as used-car prices soar

Wells Fargo
WFC,
+1.83%

in December was ordered by the U.S. regulator to pay a $3.7 billion fine to settle claims of abusive consumer lending and collection practices, including on mortgage and auto loans.

The new lawsuit claims that Credit Acceptance has been “hiding the true cost of credit being offered,” resulting in New Yorkers paying a median APR of 34.39%, which exceeds the state’s 25% legal interest rate cap, on auto loans originated from late 2015 through the spring of 2021.

A Credit Acceptance spokesman said the company believes it has complied with all applicable laws and regulations, while calling the complaint “without merit” and saying the lender “intends to vigorously defend ourselves in this matter.”

New York Attorney General James said the lender “steered hardworking New Yorkers onto a path of financial ruin by tricking them into unaffordable, high-interest auto loans while cutting backroom deals with dealers to increase their own profits,” in a statement.

Shares of Credit Acceptance were down 35.6% in the past 12 months through Wednesday, according to FactSet. The S&P 500 index
SPX,
+0.72%

was off 20% over the same stretch, while the Dow Jones Industrial Average
DJIA,
+0.32%

was down about 10%.

Related: Why an Arkansas town could provide a grim road map for America if car repos blow up 

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