The latest regulator to take on an auto lender: Massachusetts Attorney General Maura Healey reached a $7.4 million deal with American Credit Acceptance LLC (ACA) and Westlake Services LLC over allegations of excessive interest rates on subprime auto loans.

What happened

AG Healey targeted the guaranteed auto protection coverage, or GAP fees, charged by ACA and Westlake, which were sold as an add-on product by the lenders and financed in the indirect auto loan. GAP fees are "a product that is intended to limit the shortfall between the payment on an auto insurance claim and the amount the borrower owes on a car loan in the event the financed vehicle is totaled," the AG explained.

However, the inclusion of GAP fees in the calculation of interest on the ACA and Westlake indirect auto loans, as required by the Massachusetts retail installment contract law, caused the effective interest rates to exceed the state's 21 percent interest cap, Healey alleged. To settle the charges, the national indirect auto lenders agreed to eliminate interest on certain loans they purchased that included excessive rates due to the inclusion of the GAP coverage, forgive outstanding interest on the loans and reimburse consumers for the interest already paid on the loans.

Pursuant to the terms of the assurances of discontinuance filed in Suffolk Superior Court, additional audit work will be performed on ACA's and Westlake's indirect auto loan portfolios to determine if other loans are subject to refunds as well.

ACA promised to pay $1.7 million and Westlake will chip in roughly $5.7 million for its loans. The lenders will also pay $225,000 for implementation of the agreements. The Attorney General estimated that more than 2,000 Massachusetts consumers will benefit from the settlements, each receiving an average of $3,000 in relief.

"There are protections in place to ensure that consumers who take out auto loans are treated fairly and not forced to pay illegal and excessive interest rates," AG Healey said in a statement. "Our office will continue to make sure that these protections under state law are applied properly so that consumers are not exploited by predatory practices."

The actions arose as part of an ongoing subprime loan review initiative by the Massachusetts AG's Office. The $7.4 million in relief tips the total recovered by the program to more than $12 million after a prior $5.4 million deal with Santander USA Holdings Inc. last November. That case also centered on allegations of GAP fees and excessive interest.

Why it matters

AG Healey is not alone in her focus on the auto industry, however. Federal regulators have also trained their headlights on auto loans, from the Federal Trade Commission, which launched Operation Ruse Control last year to tackle issues including deceptive advertising, fraudulent add-ons, and auto loan modification to the Consumer Financial Protection Bureau (CFPB). In late 2015, the Bureau expanded its oversight to encompass larger participants in the nonbank auto-financing ecosystem in late 2015 and most recently, ordered a "Buy Here, Pay Here" car dealer to pay $700,000 in restitution to customers with a $100,000 suspended civil penalty.

To read the Massachusetts AG Office's press release about the settlement, click here.