Coalition of State Attorneys General Secures $550M Settlement with Subprime Auto Lender

A coalition of 34 state attorneys general announced on May 19, 2020, that it had secured a settlement with one of the nation's largest subprime auto financing companies for alleged violations of state consumer protection laws. Under the settlement agreement, the terms of which are discussed in detail below, the auto financing company is required to provide significant monetary relief to consumers, $550 million in total, and substantially adjust its lending practices moving forward.

The Complaints and Allegations

The complaints filed by the 34 state attorneys general allege that the auto financing company violated state deceptive and unfair trade practices statutes in various ways and that those violations resulted in significant consumer harm.

• First, the complaints allege that the auto financing company extended credit to consumers when it knew or should have known that there was no reasonable probability that the consumers would be able to repay their loans. According to the complaints, the auto financing company was extending credit to consumers who the auto financing company projected to have a greater than 70 percent chance of defaulting during the life of their loan.
• Second, the complaints allege that the auto financing company failed to disclose to consumers that they were borrowing money on terms that would likely result in them defaulting on their repayment obligations.
• Third, the complaints allege that the auto financing company failed to disclose to consumers the likely effects of loan extensions. According to the complaints, consumers routinely accepted extensions without understanding that interest continued to accrue and that future payments would likely go toward interest rather than to pay down their principal balance.
• Fourth, the complaints allege that the auto financing company required consumers to make loan payments through methods that forced them to incur third-party fees.
• Fifth, the complaints allege that the auto financing company misrepresented consumers' ability to reacquire repossessed vehicles and accepted payments from consumers when it knew or should have known that it had no control over whether consumers would actually be able to reacquire their vehicles.

The Consent Judgments and Corrective Actions

Without admitting any liability and to resolve the allegations without litigation, the auto financing company agreed to the entry of a consent judgment with each of the 34 state attorneys general participating in the multistate investigation and resulting enforcement actions. Collectively, those consent judgements require the auto financing company to provide $550 million in monetary relief to consumers, including $478 million in deficiency balance waivers, $65 million in restitution and $7 million in restitution management. The consent judgments do not stop at monetary relief. They also require considerable changes to the auto financing company's lending practices. The mandatory changes include, but are not limited to, the following:

1. the auto financing company must implement additional consumer income and expense documentation requirements;
2. the auto financing company is barred from waiving those income and expense documentation requirements;
3. the auto financing company cannot extend credit to a consumer who has a negative residual income after taking into consideration a list of actual monthly debt obligations;
4. the auto financing company is barred from requiring auto dealers to sell ancillary products, such as service contracts and extended warranties;
5. the auto financing company is required to test all loans that default in the future to determine if the consumer, at the time of loan origination, had a negative income; if so, and the consumer defaulted within a certain amount of time, the auto financing company is required to forgive the loan; and
6. the auto financing company must maintain policies and procedures for deferments, forbearances and modifications that all of its employees must follow.

Conclusion

Although the corrective actions required by the consent judgments provide some insight into best practices, those in the lending industry with questions pertaining to their operations should contact experienced counsel. If you have specific questions about how to address potential enforcement actions aimed at lending practices or general questions about how to ensure compliance with state consumer protection laws, Holland & Knight's Consumer Protection Defense and Compliance Team and White Collar Defense and Investigations Team can provide additional information. The teams are comprised of individuals with extensive experience handling investigations conducted by state attorneys general, the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB), and can provide advice on how to best navigate those investigations as well as how to avoid them altogether. Please contact the authors with any questions.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.