Subprime Auto Finance Developments
By Christopher M.A. Chamness, Katherine C. Fisher, Eric L. Johnson, and
Nicole F. Munro*
Subprime auto finance has faced intense media and regulatory scrutiny during
the past year. No longer an insignificant part of the auto finance market, the subprime
segment has grown into a multi-billion dollar industry after a period of
contraction during the Great Recession of 2008.1 The definition of “subprime”
differs by organization and observer. Different definitions include a consumer
who has a FICO credit score below 620,2 a Vantage Score 3.0 of 600 or
below,3 or a credit score below 640.4 Although the credit score is usually the
single most important criterion for what characterizes a subprime customer,
some criticize using a credit score as the sole differentiator between prime and
subprime auto finance transactions.5
The increased size and visibility of the subprime auto finance market have led
to increased media scrutiny. The New York Times ran a series of articles on
subprime auto finance that included allegations of “reverse redlining,” or the
* Christopher M.A. Chamness is an associate and Katherine C. Fisher is a partner in Hudson Cook
LLP at its Hanover, Maryland office. Eric L. Johnson is a partner in Hudson Cook LLP at its
Oklahoma City, Oklahoma office. Nicole F. Munro is a partner in Hudson Cook LLP at its Hanover,
Maryland office and is immediate past chair of the Consumer Financial Services Committee of the
American Bar Association Business Law Section.
1. Subprime and deep subprime auto finance represented 19.72 percent of the open auto financings
in the $905 billion auto finance market as of the first quarter of 2015. See Melinda Zabritski,
State of the Automotive Finance Market First Quarter 2015, at 33 (2015) (unpublished presentation),
2. See, e.g., AMY CREWS CUTTS & DENNIS W. CARLSON, SUBPRIME AUTO LOANS: A SECOND CHANCE AT ECONOMIC
OPPORTUNITY 2 (Feb. 17, 2015), http://www.equifax.com/assets/corp/subprime_auto_
economic_commentary.pdf; ARTHUR P. BAINES & MARSHA J. COURCHANE, FAIR LENDING: IMPLICATIONS
FOR THE INDIRECT AUTO FINANCE MARKET 14 (Nov. 19, 2014), https://www.afsaonline.org/Portals/0/
3. See, e.g., Zabritski, supra note 1, at 33.
4. See, e.g., Jessica Silver-Greenberg & Michael Corkery, In a Subprime Bubble for Used Cars, Borrowers
Pay Sky-High Rates, N.Y. TIMES, July 19, 2014, at A1, http://dealbook.nytimes.com/2014/07/19/
5. See, e.g., CUTTS & CARLSON, supra note 2, at 2 n.1.
targeting of minorities with the most expensive auto loans,6 abusive title loans
and repossession practices,7 loan values that exceed the value of the vehicle,8
and hidden defects in used cars marketed to subprime buyers.9 The series
also condemned the use of geolocation technology and starter interrupt technology
in vehicles sold to subprime purchasers.10 In this media environment, legislators
and regulators have focused their efforts on curbing perceived abuses in
the subprime marketplace.
PROPOSED STATE LEGISLATION
The New York Independent Democratic Caucus (“IDC”) published a report on
subprime auto lending practices in April 2015.11 The IDC wrote the report following
several developments, including the articles in the New York Times about
the subprime auto finance market,12 a request for expression of interest to banks
and credit unions in creating a “safe and affordable auto loan product” by the
New York City Department of Consumer Affairs in March 2015,13 and a public
hearing on subprime auto finance before the New York Senate Standing Committee
on Banks in April 2015.14 The IDC report focused on eight allegedly deceptive
lending practices in the subprime market that were not previously subject
to a regulatory framework, including auto credit with “abusively high
interest rates” of around 24 percent;15 high loan-to-value ratios due to negative
equity and ancillary product financing;16 dealer financing markups, without disclosure
requirements;17 dealer fraud in forcing buyers to purchase “optional” ancillary
products, completing applications on behalf of buyers, and falsifying
6. Michael Corkery & Jessica Silver-Greenberg, Prosecutors Scrutinize Minority Borrowers’ Auto
Loans, N.Y. TIMES, Mar. 30, 2015, at B1, http://www.nytimes.com/2015/03/31/business/dealbook/
7. Jessica Silver-Greenberg & Michael Corkery, Rise in Loans Linked to Cars Is Hurting Poor, N.Y.
TIMES, Dec. 25, 2014, at A1, http://dealbook.nytimes.com/2014/12/25/dipping-into-auto-equitydevastates-
8. Jessica Silver-Greenberg & Michael Corkery, In a Subprime Bubble for Used Cars, Borrowers Pay
Sky-High Rates, N.Y. TIMES, July 19, 2014, at A1, http://dealbook.nytimes.com/2014/07/19/in-asubprime-
10. Michael Corkery & Jessica Silver-Greenberg, Miss a Payment? Good Luck Moving that Car, N.Y.
TIMES, Sept. 24, 2014, at A1, http://dealbook.nytimes.com/2014/09/24/miss-a-payment-good-luckmoving-
11. See INDEP. DEMOCRATIC CONFERENCE, ROAD TO CREDIT DANGER: PREDATORY SUBPRIME AUTO LENDING IN
NEW YORK (Apr. 2015) [hereinafter IDC REPORT].
12. See supra notes 4, 6–10 and accompanying text.
13. See Press Release, N.Y. City Dep’t of Consumer Affairs, New Car Loan Initiative to Help Curb
Predatory Subprime Loans and Abusive Dealer Financing Practices for Used Car Buyers with Low
Incomes (Mar. 23, 2015), http://www1.nyc.gov/site/dca/media/pr032315.page.
14. An Examination of Predatory Lending Practices Within the Subprime Auto Loans and Auto Title Loan
Industry, N.Y. SENATE (Apr. 23, 2015), http://www.nysenate.gov/event/2015/apr/23/examinationpredatory-
15. IDC REPORT, supra note 11, at 6.
16. Id. at 7.
724 The Business Lawyer; Vol. 71, Spring 2016
income levels;18 spot delivery;19 and the use of electronic tracking devices and
starter interrupt devices.20
The IDC report outlined proposals for eleven bills as “legislative solutions” to
combat the allegedly deceptive subprime auto finance practices noted in the report.
21 Nine different pieces of legislation were introduced in response to the
IDC report, addressing many, but not all, of the allegedly deceptive subprime
practices, which remain pending as of this writing.22 Some of the bills apply
to used motor vehicle dealers only. Senate Bill 5484 would provide for a
three-day cooling-off period after the purchase of a used motor vehicle from a
dealer.23 Senate Bill 5485 would require used motor vehicle dealers to maintain
a $20,000 surety if the dealer sells fifty or fewer vehicles per year and a $100,000
surety bond if it sells more than fifty a year.24
Although each bill arose out of the IDC report, many apply beyond subprime
auto finance markets, by placing supervisory and enforcement powers in the
hands of the New York regulators for auto sales and finance more generally. Senate
Bill 5269 would prohibit any secured creditor from remotely disabling a vehicle
without first providing notice of the disabling to the debtor.25 Senate Bill
5488 would authorize the New York Department of Law to write and enforce
regulations relating to motor vehicle dealers’ advertising and marketing.26 Senate
Bill 5489 would grant the New York Department of Financial Services jurisdiction
over the financing of motor vehicles and require dealer finance managers to
be licensed by the department.27 Senate Bill 5490 would authorize the New York
Superintendent of Financial Services to oversee and regulate all motor vehicle
transactions with consumers, require motor vehicle installment contracts to include
an itemized listing of all costs related to the purchase of a motor vehicle,
prohibit spot delivery, and require motor vehicle dealers to provide credit applicants
with copies of application documents.28 Senate Bill 5491 would require
motor vehicle dealers to disclose price markups to buyers and would authorize
a study of dealer markups.29
18. Id. at 8.
19. The term “spot delivery” refers to a motor vehicle dealer practice where the dealer allows an
installment sale buyer to take possession of the vehicle when financing is not yet final. Id. at 9.
21. Id. at 25.
22. See S.B. 5269, 238th Gen. Assemb. (N.Y. 2015); S.B. 5484, 238th Gen. Assemb. (N.Y. 2015);
S.B. 5485, 238th Gen. Assemb. (N.Y. 2015); S.B. 5488, 238th Gen. Assemb. (N.Y. 2015); S.B. 5489,
238th Gen. Assemb. (N.Y. 2015); S.B. 5490, 238th Gen. Assemb. (N.Y. 2015); S.B. 5491, 238th Gen.
Assemb. (N.Y. 2015); S.B. 5506, 238th Gen. Assemb. (N.Y. 2015); A.B. 8066, 238th Gen. Assemb.
23. S.B. 5484, 238th Gen. Assemb. (N.Y. 2015).
24. S.B. 5485, 238th Gen. Assemb. (N.Y. 2015).
25. S.B. 5269, 238th Gen. Assemb. (N.Y. 2015). Although starter interrupt technology is primarily
used in subprime finance, this bill would govern the use of starter interrupt technology by any secured
26. S.B. 5488, 238th Gen. Assemb. (N.Y. 2015).
27. S.B. 5489, 238th Gen. Assemb. (N.Y. 2015).
28. S.B. 5490, 238th Gen. Assemb. (N.Y. 2015).
29. S.B. 5491, 238th Gen. Assemb. (N.Y. 2015).
Subprime Auto Finance Developments 725
Finally, with respect to any motor vehicle retail installment credit transaction,
Senate Bill 5506 would amend New York’s Personal Property Law, which limits
holder-in-due-course liability for assignees to the amount owed to an assignee
when a claim or defense is asserted, to treat attorney’s fees and costs separately.
Thus, a successful consumer can recover up to the amount owing on the contract,
and if attorney’s fees and costs are awarded, the consumer may also recover
those fees and costs.30
In addition, California was one of the first states to adopt laws governing the
use of payment assurance technology to track a vehicle (“electronic tracking
technology”) or to disable the starter of a vehicle (“starter interrupt technology”)
in connection with collections on motor vehicle sales.31 Among other limits, the
California law provides that a buy-here-pay-here (“BHPH”) dealer may not disable
a vehicle using starter interrupt technology unless: the dealer gives written
notice at the time of the sale that the vehicle is equipped with the technology; the
written notice informs the buyer that no less than forty-eight hours’ warning will
be given before the starter interrupt technology will be used; the dealer offers the
buyer a choice of warning methods; and, in the event of an emergency, the buyer
will be provided with the ability to start a disabled vehicle for no less than
twenty-four hours after its initial disablement.32
The California law was amended in 2015 to require that dealers send an additional
notice five days before using the starter interrupt technology to disable
the vehicle for all weekly payment term contracts and ten days before the use of
the technology on all other contracts.33 The amendment requires that the written
disclosure inform the buyer about the ability to restart a dealer-disabled vehicle
in an emergency.34 The amendment also increases the maximum fine amount
from $1,000 to $2,000 for violations.35
FEDERAL AND STATE ENFORCEMENT DEVELOPMENTS
A number of federal and state regulators have taken action against dealers in
the subprime auto market. The Bureau of Consumer Financial Protection
(“CFPB”) announced a consent order against DriveTime Automotive Group,
Inc., one of the largest BHPH dealerships in the country, and its affiliated finance
company (“DriveTime”) in November 2014.36 In addition to alleged violations of
30. S.B. 5506, 238th Gen. Assemb. (N.Y. 2015).
31. See CAL. CIV. CODE § 2983.37 (West, Westlaw current through Reg. Sess. 2015); see, e.g., COLO.
REV. STAT. ANN. § 4-9-609(e) (West, Westlaw current through Reg. Sess. 2015); CONN. GEN. STAT. ANN.
§ 42-9-609 (West 2014).
32. CAL. CIV. CODE § 2983.37 (West, Westlaw current through Reg. Sess. 2015).
33. 2015 Cal. Legis. Serv. ch. 179 (A.B. 265) (to be codified at CAL. CIV. CODE § 2983.37).
36. Consent Order, CFPB v. DriveTime Auto. Grp., Inc., No. 2014-CFPB-0017 (Nov. 19, 2014)
[hereinafter DriveTime Consent Order], http://files.consumerfinance.gov/f/201411_cfpb_consentorder_
726 The Business Lawyer; Vol. 71, Spring 2016
the credit reporting laws,37 the CFPB asserted that DriveTime harassed consumers
with debt collection calls, including, for example, calling one consumer thirty
times after her do-not-call request and causing another consumer to lose her job
because of repeated collection calls to her workplace.38 DriveTime also allegedly
called consumers’ references repeatedly even after it was asked to stop.39 Under
the consent order, DriveTime agreed to end the debt collection tactics categorized
by the CFPB as “unfair” and institute appropriate collection call procedures.40 It
also agreed to pay an $8 million civil penalty.41
In February 2015, the U.S. Department of Justice and the North Carolina Department
of Justice announced a settlement of the first discrimination lawsuit
involving BHPH auto finance.42 The consent order against two BHPH dealerships,
Auto Fare, Inc. and Southeastern Auto Corp., resolved allegations
made in January 201443 that the dealerships and their owner engaged in a pattern
or practice of discrimination in credit transactions on the basis of race or
color and engaged in unlawful repossession activity in violation of state
law.44 The allegations included the claim that the dealerships intentionally targeted
African-American customers for the extension and servicing of credit on
unfair and predatory terms without meaningfully assessing the customers’ creditworthiness,
a practice commonly referred to as “reverse redlining.”45 Under
the settlement, the dealerships must establish a $225,000 settlement fund to
compensate victims of the past alleged discriminatory and predatory lending.46
The dealerships must also limit monthly payments to no more than 25 percent
of a borrower’s income,47 set interest rates at least 5 percentage points below the
state’s rate cap,48 and offer sales prices competitive with other BHPH dealers in
The Federal Trade Commission (“FTC”) also brought several enforcement actions
against auto dealers that allegedly made deceptive advertising claims. In
37. See Andrew M. Smith & Peter Gilbert, Fair Credit Reporting Act and Financial Privacy Update—
2015, 71 BUS. LAW. 661 (2016) (in this Annual Survey).
38. DriveTime Consent Order, supra note 36, at 5.
39. Id. at 6.
40. Id. at 13–16.
41. Id. at 22.
42. See Press Release, U.S. Dep’t of Justice, Justice Department and North Carolina Attorney General
Reach Settlement to Resolve Allegations of Auto Lending Discrimination by “Buy Here, Pay Here”
Used-Car Dealerships (Feb. 10, 2015), http://www.justice.gov/opa/pr/us-justice-department-andnorth-
43. See Complaint, United States v. Auto Fare, Inc., No. 3:14-cv-8-RJC-DSC (W.D.N.C. Jan. 13,
2014) [hereinafter Auto Fare Complaint], http://www.justice.gov/crt/about/hce/documents/
autofarecomp.pdf; see also John L. Ropiequet, Christopher S. Naveja & L. Jean Noonan, Fair Lending
Developments: A Continuation and a New Beginning, 70 BUS. LAW. 625, 629–30 (2015) (in the 2015
44. Consent Order, United States v. Auto Fare, Inc., No. 3:14-CV-8-RJC-DSC (W.D.N.C. Feb. 10,
2015) [hereinafter Auto Fare Consent Order], http://www.justice.gov/file/340006/download.
45. Auto Fare Complaint, supra note 43, at 3.
46. Auto Fare Consent Order, supra note 44, at 12.
47. Id. at 3–4.
48. Id. at 5.
49. Id. at 6.
Subprime Auto Finance Developments 727
December 2014, the FTC charged that a Texas auto dealer, TXVT Limited Partnership,
advertised enticing prices, lease or finance terms, and promotions and
then deceptively attempted to disclaim those offers using small text in its print
and video advertisements.50 For example, one advertisement allegedly misled
consumers into thinking that they could get out of their current financing contract
or lease for only $1.51 The FTC alleged that the advertisement was deceptive
because consumers could not get out of their financing contract or lease for
$1, and instead the dealership would add the balance of any obligation to the
new financing contract.52 In addition, the consumer would be required to pay
any other amounts, such as lease termination fees.53 In other advertisements,
the dealer used small, fine print at the bottom of the advertisement to include
the financing term, the Annual Percentage Rate, and other required terms.54
The FTC approved a final order settling the matter in February 2015.55
In June 2015, the FTC charged that TC Dealership, L.P.56 and JS Autoworld,
Inc.57 ran advertisements that misrepresented the purchase price or leasing offers
of vehicles and the amount due at signing. The advertisements also allegedly
violated federal law by failing to disclose the required credit and lease terms.58 In
connection with one of Planet Hyundai’s advertisements, the FTC charged that
the dealer misled consumers by prominently advertising a vehicle price for
“$0 DOWN AVAILABLE,” but noting in fine print that consumers must turn
in a vehicle with a trade-in value of at least $2,500.59 The FTC alleged that Planet
Nissan included prominent offers for “PURCHASE! NOT A LEASE!” when many
of the offers were for leases.60 The dealers agreed to settle the FTC charges in
June 2015 by agreeing not to misrepresent the cost to purchase or lease a vehicle
and to comply with the applicable federal consumer financial laws.61
In March 2015, the FTC and thirty-two law enforcement partners announced
“Operation Ruse Control” to target auto finance application fraud, deceptive
50. See Complaint, In re TXVT Ltd. P’ship, No. C-4508 (F.T.C. Dec. 23, 2014), https://www.ftc.
51. Id. at 2.
52. Id. at 4.
54. Id. at 5.
55. In re TXVT Ltd. P’ship, No. C-4508 (F.T.C. Feb. 12, 2015) (decision and order), https://www.
56. See Complaint, In re TC Dealership, L.P., No. 152 3096 (F.T.C. June 29, 2015) [hereinafter
TC Dealership Complaint], https://www.ftc.gov/system/files/documents/cases/150629planet
57. See Complaint, In re JS Autoworld, Inc., No. 152 3069 (F.T.C. June 29, 2015) [hereinafter JS
Autoworld Complaint], https://www.ftc.gov/system/files/documents/cases/150629planetnissancmpt.
58. TC Dealership Complaint, supra note 56, at 5; JS Autoworld Complaint, supra note 57, at 6, 7.
59. TC Dealership Complaint, supra note 56, at 3.
60. JS Autoworld Complaint, supra note 57, at 3.
61. See Agreement Containing Consent Order, In re TC Dealership, L.P., No. 152 3096 (F.T.C.
June 29, 2015), https://www.ftc.gov/system/files/documents/cases/150629planethyundaiagree.pdf;
Agreement Containing Consent Order, In re JS Autoworld, Inc., No. 152 3069 (F.T.C. June 29,
728 The Business Lawyer; Vol. 71, Spring 2016
practices related to add-on products and services, and deceptive advertising.62 In
connection with add-on products, the FTC charged that National Payment Network,
Inc. (“NPN”) deceptively pitched consumers on a biweekly payment plan
program to finance auto purchases that it claimed would save consumers
money.63 NPN allegedly failed to disclose that it charged significant fees for
the service that would cancel out any actual savings from the program.64 The
FTC approved a final order settling the matter in May 2015.65 In a related
case, the FTC charged that Matt Blatt Inc. and Glassboro Imports, LLC failed
to disclose the fees on NPN’s biweekly payment plan add-on service and that
consumers would not save money due to the program’s high fees.66 The FTC
approved a final order settling the matter in July 2015.67
As part of Operation Ruse Control, the FTC also alleged that three dealers, located
in Florida, Alabama, and California, deceptively advertised the sale, financing,
and leasing of their vehicles.68 The FTC alleged that these dealers’ advertisements
touted sales, lease, or financing options that appealed to but were not
generally available to their consumers and with benefits that were cancelled
out by small, fine-print disclaimers. The FTC approved final orders settling
two of the matters in May 201569 and the third matter in July 2015.70
62. See Press Release, Fed. Trade Comm’n, FTC, Law Enforcement Partners to Announce Crackdown
on Deception, Fraud in Auto Industry (Mar. 25, 2015), https://www.ftc.gov/news-events/pressreleases/
63. See Complaint, In re Nat’l Payment Network, Inc., No. C-4521 (F.T.C. Mar. 26, 2015), https://
64. Id. at 5.
65. See In re Nat’l Payment Network, Inc., No. C-4521 (F.T.C. May 4, 2015) (decision and order),
66. See Complaint, In re Matt Blatt Inc., No. C-4532 (F.T.C. Mar. 26, 2015), https://www.ftc.gov/
67. See In re Matt Blatt Inc., No. C-4532 (F.T.C. July 2, 2015) (decision and order), https://www.
68. See Complaint, In re TT of Longwood, Inc., No. C-4531 (F.T.C. Mar. 26, 2015), https://www.
ftc.gov/system/files/documents/cases/150327coryfairbankscmpt.pdf; Complaint, In re Jim Burke Auto.,
Inc., No. C-4523 (F.T.C. Mar. 26, 2015), https://www.ftc.gov/system/files/documents/cases/
150326burkenissancmpt.pdf; Complaint, In re City Nissan Inc., No. C-4524 (F.T.C. Mar. 26, 2015),
69. See In re Jim Burke Auto., Inc., No. C-4523 (F.T.C. May 4, 2015) (decision and order), https://
www.ftc.gov/system/files/documents/cases/150529jimburkenissando.pdf; In re City Nissan Inc., No.
C-4524 (F.T.C. May 4, 2015) (decision and order), https://www.ftc.gov/system/files/documents/
70. See In re TT of Longwood, Inc., No. C-4531 (F.T.C. July 2, 2015) (decision and order), https://
Subprime Auto Finance Developments 729