On January 4, 2023, the Consumer Financial Protection Bureau (CFPB) and New York Attorney General (“NYAG”) (collectively, the “Plaintiffs”) filed a complaint in the Southern District of New York against Credit Acceptance Corporation, one of the largest subprime indirect auto financing companies in the country, for alleged misconduct in the origination and servicing of its auto retail installment contracts. While the Complaint asserts several untested legal theories, the unquestioned headliner is its allegation that Credit Acceptance incentivizes dealers to inflate the selling price of financed vehicles, thereby creating “hidden finance charges.” As demonstrated below, this allegation faces a number of legal obstacles, several of which should prove insurmountable. But if given credence, Plaintiffs’ “hidden finance charge” theory could pose an existential threat to the indirect auto finance industry, and could negatively impact the entire consumer finance market.
As an initial matter, it is important to provide a basic primer on how indirect auto lending transactions generally work. In the simplest terms, indirect auto lending transactions are really three separate transactions: (1) the dealer sells the vehicle to the consumer after negotiating a price; (2) the dealer arranges financing for the consumer, usually in the form of a retail installment contract that is signed by both the dealer and consumer; and (3) the dealer sells or assigns the retail installment contract to a finance company, who then becomes the party with the right to payment under the contract. In transactions (1) and (2), the dealer and consumer agree on virtually all the important terms—most significant here, the vehicle’s sale price—before the contract is handed off in transaction (3) to the finance company to administer servicing and the collection of payments.
At the center of the Plaintiffs’ hidden finance charge theory is the allegation that Credit Acceptance’s business model for purchasing retail installment contracts at a discount – a common industry practice that has long been established as legal – incentivizes dealers to artificially inflate the selling price for vehicles that are being financed.[1] Based on this allegation, the Plaintiffs argue the vehicle price stated in the retail installment contract -- the one the consumer and dealer negotiated and agreed to – is not the true cash price, but instead is an artificially inflated price meant to secure more money for the dealer once the contract is sold. The Plaintiffs theorize that the amount Credit Acceptance pays the dealer for the contract (Dealer Compensation)[2] is the true cash price because if the dealer was willing to accept the Dealer Compensation amount to assign the customer’s retail installment contract to Credit Acceptance then it would have accepted the same cash amount to sell the vehicle to the consumer in an all-cash deal. Using their hypothetical cash price (i.e., the Dealer Compensation) as a “proxy” for the vehicle’s true cash price, the Plaintiffs contend that a hidden finance charge exists whenever the amount financed outlined in the retail installment contract, that discount off the amount financed figure is a hidden finance charge – an amount that would not have been charged to the consumer but for the fact that the transaction was financed. The Plaintiffs allege these hidden finance charges are problematic because they are undisclosed and also because, if properly applied, many of the contracts at issue would contain finance charges in excess of amounts allowable under law.
The Plaintiffs’ hidden finance charge theory faces some serious legal headwinds. For one, it appears to directly contradict the CFPB’s Official Interpretation of Regulation Z, which implements the Truth-in-Lending Act (TILA). According to that interpretation, “[a] discount imposed on a credit obligation when it is assigned by a seller-creditor to another party is not a finance charge as long as the discount is not separately imposed on the consumer.” It also provides that “[c]harges absorbed by the creditor as a cost of doing business are not finance charges, even though the creditor may take such costs into consideration in determining . . . the cash price of the property or service sold.” Significantly, the Plaintiffs’ Complaint fails to address this language, much less assert any facts to distinguish the discounts Credit Acceptance pays from the ones the CFPB’s own official commentary says are legal.
Further, the Plaintiffs’ theory appears to seek an end-round of TILA’s limitations on assignee liability for disclosure violations as well as other limitations on assignee liability under the FTC Holder Rule.[3] TILA is clear that the assignee of a contract like Credit Acceptance is only liable for disclosure violations “if the violation for which such action or proceeding is brought is apparent on the face of the disclosure statement.” It stands to reason an inflated vehicle price would not be apparent on the face of the contract to an assignee like Credit Acceptance that is not present at the time of vehicle purchase, has no role in negotiating price, and has no contact with the consumer at the time of purchase. Similarly, an allegedly inflated finance charge cannot be both “hidden” as the Plaintiffs claim and apparent from the disclosure statement at the same time. Yet, the Plaintiffs persist that Credit Acceptance and finance companies like it should be held liable for these alleged dealer disclosure violations even if they are in no way apparent from the face of the contract.
In addition to these (and other) potential legal obstacles, the Plaintiffs’ theory, if recognized, could result in a host of negative unintended consequences. Most notably, it threatens to curtail, or perhaps end altogether, the common and legal commercial practice of buying automobile retail installment contracts at a discounted rate, which taken to its logical conclusion, could be applied to a host of similarly situated industries. This could limit competition in the market for financing vehicle purchases, and in turn, adversely impact access to a broad range of credit, particularly among credit-challenged consumers, in contravention of the CFPB’s own stated purpose and objectives.
In sum, the Plaintiffs’ Complaint and particularly its hidden finance charge theory represent a new attack on the subprime indirect auto finance industry that, because of the existential threat posed, must be closely monitored. Burr & Forman, LLP will continue to provide updates as new developments arise.
[1] Notably, the Complaint concedes that, “since January 2019, [Credit Acceptance] has restricted dealers from increasing the price [of a vehicle] beyond 115% of the highest Black Book or Blue Book (i.e., best condition) for the make and model in question.” Compl., p. 15.
[2] This Dealer Compensation figure also includes any down payment made by the consumer or trade-in value credited to the transaction.
[3] Federal case law is clear that, where applicable, TILA’s prohibitions regarding assignee liability preempt the Holder Rule.
PartnerMatt Mitchell is a partner in the firm’s financial services litigation practice group, where he defends financial institutions such as banks, mortgage lenders, credit card companies, auto finance companies and debt ...
