On May 19, 2020, a coalition of 34 state attorneys general announced a settlement of over $550 million with an auto financing company. The settlement is the result of a five year, multi-state investigation into the company’s subprime lending practices. The company is alleged to have used a sophisticated credit scoring model to identify populations of consumers that were predicted to have a high likelihood of default and then placing them into risky auto loans. These loans were alleged to have had high loan-to-value rations, significant backend fees, and high payment-to-income ratios. The company also allegedly failed to adequately monitor dealers to minimize the risk that those dealers were receiving and using falsified information, including the amount of income and expenses used to qualify borrowers. Additionally, the company is alleged to have engaged in deceptive servicing practices by misleading consumers about their rights and the risks of partial payments and loan extensions.
Under the settlement, the company will waive deficiency balances for certain defaulted consumers, resulting in a total of $433 million in immediate cancellation of loans still owned by the company. Additionally, the company will provide $65 million in consumer restitution to compensate consumers who defaulted on their auto loans between January 1, 2010 and December 31, 2019. The company will also provide up to $45 million in debt cancellation for any consumer in the highest risk category who defaulted as of December 31, 2019. Lastly, the company agreed to pay $2 million to the settlement administrator and $5 million to the Multistate Working Group.
The company may still continue its operations but may no longer extend financing to consumers with negative residual incomes. The company must also monitor dealers to ensure documentation requirements are being followed and can no longer require those dealers to sell add-on products. A Monitoring Committee comprised of various state attorneys general will monitor the company for the next three years.