Ability-To-Repay Enforcement Comes To Auto Finance

In recent years, regulators and enforcement agencies have eagerly exercised their authority to prosecute what they perceive as unfair or deceptive acts and practices (UDAPs). Unfortunately for the auto finance industry, these regulators and agencies show no sign of tapping the brakes on such actions. To the contrary, recent events suggest that they may be gearing up to hit the accelerator by using UDAP theories to extend ability-to-repay principles to auto finance.

On March 29, 2017, the Massachusetts and Delaware attorneys general (the states) announced settlements with Santander Consumer USA Holdings Inc. (the company) over allegations that the company “facilitated” the origination of subprime auto finance contracts when it knew or should have known that contracting consumers likely could not repay. The company is an indirect auto finance company that purchases subprime retail installment contracts from motor vehicle dealers.

The settlements focus on consumers’ ability to repay their installment contracts, which is a novel claim in the auto finance context. While Massachusetts has previously seen similar UDAP theories applied to underwriting practices and a consumer’s ability to repay in the subprime mortgage context, Delaware has not seen UDAP theories applied in such scenarios. In neither state, however, had the ability-to-repay UDAP theory been applied to subprime auto finance — until now. Given Massachusetts’ and Delaware’s entrée in this new space, and the now-familiar refrain among industry critics that “subprime auto is the new subprime mortgage,” other regulators and enforcement agencies may take this new liability theory out for a spin.

Originally published in Law360; reprinted with permission.