Subprime car lender faces tough week with lending lawsuit, stock swoon

DETROIT -- It's shaping up to be a rough week for Credit Acceptance Corp.

The suburban Detroit subprime auto lender has, in the span of a few days, seen its stock price fall off a cliff, had a lawsuit filed against it by the state attorney general of Massachusetts and drawn the ire of a notorious activist short-seller who believes Credit Acceptance is vastly overvalued and has unscrupulous business practices.

Company CEO Brett Roberts also sold a batch of stock just days before multiple states sent the company subpoenas that questions its business practices, according to federal regulatory filings.

Credit Acceptance's borrowing and lending practices are the common theme in the various complaints made against the company, which employed more than 2,100 people in 2019 when it was named one of the best 100 companies to work for by Forbes.

Credit Acceptance had 2019 revenue of $1.49 billion, up 53.6 percent from 2016, according to its eighth-place ranking on Crain's Detroit Business' 2020 list of the 50 fastest-growing companies in Southeast Michigan. Crain's is an affiliate of Automotive News.

"This company made unaffordable and illegal loans to borrowers causing them to fall into thousands of dollars of debt and even lose their vehicles," Massachusetts Attorney General Maura Healy said in a statement Monday. "We are taking a close look at this industry and we will not allow companies to profit by violating our laws and exploiting consumers."

The Massachusetts lawsuit says between 2012 and 2018 Credit Acceptance and its employees "harassed" borrowers in the Bay State by calling them as often as eight times a day. State law says such calls are to be limited to no more than twice per week.

The lawsuit alleges that the lender defrauded as many as 24,000 borrowers over a six-year period in Massachusetts, and seeks as much as $120 million in damages and injunctive relief, according to a CBS MoneyWatch report.

The lawsuit also alleges that Credit Acceptance did not inform investors that the company topped off the pools of loans they packaged and securitized with higher-risk loans, despite claiming otherwise in disclosures to investors.

The lawsuit lays out seven specific areas where Massassachusetts says Credit Acceptance has acted improperly, ranging from unfair or deceptive collection practices to improper repossession practices.

The company did not respond to a Crain's request for comment.

The accusations laid out in the Massachusetts lawsuit — coupled with some 40 states in total investigating the company's business practices — speak to the concerns of Andrew Left of Citron Research, a Los Angeles-based activist investor and short-seller who has taken a financial position in Credit Acceptance Corp., saying its stock is vastly overvalued.

"They take advantage of the people of Detroit. They take the people who can't afford (the loans) and they almost terrorize them financially," Left said in an interview with Crain's. "They could still have a good, profitable business and not be as aggressive as they are."

A spokesman for the office of Michigan Attorney General Dana Nessel confirmed the agency has gotten complaints about Credit Acceptance, but declined to comment on whether a formal investigation had been initiated.

On Aug. 11, the company disclosed in a regulatory filing that 40 states, including Michigan, were involved in an inquiry first begun in 2016 by the Maryland attorney general related to Credit Acceptance's "repossession and sale policies and procedures."
Credit Acceptance said in a filing that it is cooperating in the inquiries.

Just days before those subpoenas were sent to Credit Acceptance, CEO Roberts sold more than $10.7 million in stock, according to a Crain's review of federal regulatory filings.

Roberts sold the shares on Aug. 7, which were disclosed in a filing on Aug. 11, the same day the company received subpoenas informing executives of expanded inquiries by states into lending and collections practices.

The subpoenas were disclosed in an Aug. 13 filing. It is unclear whether Roberts' stock sales were pursuant to a prearranged plan of stock sales, something that is common for executives of public companies.

Investors have taken notice of the string of bad news. When Roberts sold those shares on Aug. 7, the stock closed at $513.61. Credit Acceptance stock closed Tuesday at $374.07, a 27 percent decline in three weeks. The shares recovered slightly on Wednesday, trading up 3.5 percent to $387.18 in midday trading.

Adding to troubles for a lender like Credit Acceptance: More than 1 million people in the U.S. have filed for unemployment benefits every week except for one since late March, as Crain's has eported. That's made it difficult for many people to pay their car loans, but executives at the company say they're working with those struggling to pay.

"So we — like we always do — work with customers that are having difficulty making their payments," Roberts said on a July 30 earnings call, according to a transcript. "The objective is to keep the customer in the vehicle. It's good for the customer, it's good for us."

But the company's second-quarter earnings report shows that the stunted economy is indeed creating issues with collections.

The second-quarter earnings report for Credit Acceptance shows that net income for the first half of 2020 declined 96 percent from the same period last year, to $12.6 million. However, the company used "adjusted" non-generally accepted accounting principles to show investors and analysts that net income grew 4.2 percent to almost $330 million.

"Adjusted financial results are provided to help shareholders understand our financial performance," the company said in its earnings report.