Those methods, according to a Consumer Reports review of regulatory filing and legal documents, sometimes start with lenders working with dealers to mark up cars sold to low-income borrowers more than they do for customers with better credit, or to upsell them into pricier cars they can’t afford. Lenders are also accused of structuring the loans and their arrangements with dealers in ways that all but guarantee a profit even if borrowers default, the attorneys general say.
And when borrowers fall behind, as often happens, lenders aggressively work to collect debts through repossession and wage garnishment, according to allegations in the documents CR reviewed.
“There are some lenders with a business model, it seems, that expects some level of repossession, perhaps even desires some level of repossession,” says Pamela Foohey, a professor at the Benjamin N. Cardozo School of Law in New York City, who has published several studies on auto lending.
In the the third quarter of 2021, Credit Acceptance and Santander reported net profits of $250 million and $763 million, respectively, over the preceding three months.
In other words, it’s good business writing bad loans.
But it’s a perilous model for low-credit consumers. The sky-high interest rates, with terms often stretching 72 months or longer and monthly payments eating up a significant portion of their income, make default likely.
And when that happens, lives can be turned inside out. When a person’s car is repossessed and their wages and tax refunds are garnished, a vicious cycle begins that makes it difficult for them to rebuild credit, hold down a job, or pay rent or other bills.
Santander declined to comment on specific questions from CR about the allegations, but said in a statement that it’s a “responsible lender” operating in a highly regulated environment.
“We treat our customers as individuals, striving to find sustainable financing solutions that work across a broad range of incomes and credit scores,” said Laurie Kight, a company spokesperson. “If customers fall behind on payment, we seek to provide options to help them maintain their vehicle, including loan modifications and payment deferments, as repossession is always a last resort.”
Credit Acceptance also declined to comment on specific questions about ongoing legal cases, citing company policy.
“Credit Acceptance has been in business for nearly 50 years because we offer financing programs through car dealers nationwide allowing credit-challenged and credit-invisible consumers to purchase vehicles and build or rebuild their credit,” the company said in a statement to CR.
“We were pleased to have resolved the allegations brought by the Massachusetts Attorney General and Mississippi Attorney General in 2021, and proudly continue to serve customers in those states through our financing programs.”
Josh Lauer, an associate communications professor at the University of New Hampshire who has written extensively about the credit scoring industry, points to the development of credit scores—something that factors heavily into the underwriting of auto loans—as a double-edged sword. As a result of credit scoring, more people can get access to loans, but for some, those loans can be a financial disaster.
“It helps unethical lenders identify the most vulnerable borrowers, and then to take advantage of them,” Lauer says. “Most lenders are presumably trying to make money but do it in an ethical way.”