On January 4, the Consumer Financial Protection Bureau (CFPB) and New York Attorney General (NY AG) filed a joint complaint in the U.S. District Court for the Southern District of New York against Credit Acceptance Corporation (Credit Acceptance), a major subprime indirect auto finance company. On March 14, Credit Acceptance filed a motion to dismiss the complaint, and on March 21, Troutman Pepper filed an amicus curiae brief in support of Credit Acceptance on behalf of the American Financial Services Association, the Consumer Bankers Association, and the Chamber of Commerce of the United States.

Among other things, the complaint asserts that Credit Acceptance engaged in deceptive and abusive practices in financing used automobile sales predominantly to subprime consumers by allegedly: (1) allowing and incentivizing dealers to sell vehicles at inflated cash prices that incorporated “hidden finance charges”; (2) financing sales to consumers without considering whether they have the ability to repay the credit they receive; and (3) allowing and incentivizing dealers to engage in deceptive practices in connection with the sale of add-on products.

As a threshold argument, the motion to dismiss challenges, under the appropriations clause of the U.S. Constitution, the CFPB’s right to use unappropriated funds to bring a lawsuit against Credit Acceptance. This issue is currently pending before the Supreme Court.

The motion to dismiss further argues that the complaint fails to state a valid claim as a matter of law for several reasons, including some of the key arguments highlighted below.

As to the complaint’s “hidden finance charge” claims, the motion to dismiss observes:

(1) The complaint fails to allege that Credit Acceptance deceived any consumers regarding alleged “hidden finance charges.” Indeed, the motion to dismiss explains that consumers receive credit under retail installment contracts with the motor vehicle dealers and that Credit Acceptance has no contact with vehicle purchasers until after the credit agreements are executed and assigned to the company by the dealer.

(2) The complaint does not allege a single instance where a dealer charged a consumer a higher “cash price” on a financed sale because the consumer financed the purchase, as is required to state a claim related to “hidden finance charges.” Rather than comparing the actual prices paid by the consumers at issue to those offered to cash buyers, the complaint alleges that the prices paid by consumers contained a “hidden finance charge” merely because they exceeded a hypothetical “cash price proxy” created by the plaintiffs for the purposes of the litigation. The upshot of the plaintiffs’ theory — which is based on how much a dealer was paid by the finance company — is that every contract contains a “hidden finance charge” any time a finance company accepts assignment of a contract at a “discount.” The Second Circuit has rejected similar pleading tactics in the past, and the CFPB’s official interpretation of the governing disclosure regulations is clear that assignment discounts are not finance charges unless separately imposed on consumers in individual transactions — a test the complaint’s “cash price proxy” theory does not satisfy.

(3) Assignees of consumer credit contracts are only liable under the Truth in Lending Act for violations that are apparent on the face of the TILA disclosure statement and other assigned documents, whereas alleged hidden finance charges, by definition, cannot meet this test.

As to the complaint’s ability-to-repay claims, the motion to dismiss notes that (1) the financed contracts in question clearly state the consumers’ payment obligations, (2) the vehicle purchasers are in a better position than Credit Acceptance to assess their specific financial situations and income stability, and (3) the consumer purchasers are able to consult publicly available information concerning car values and to compare prices available from competitors of the dealers. Credit Acceptance also points out that ability-to-repay requirements should not be imposed ad hoc through private litigation against a single company given there is no express statutory authorization for ability-to-pay mandates in the auto finance context (as opposed to mortgages or credit cards), and the plaintiffs did not engage in the appropriate (and transparent) notice-and-comment rulemaking process.

Lastly, in response to the complaint’s claims concerning add-on products, the motion to dismiss argues that Credit Acceptance cannot be held liable for aiding and abetting alleged dealer deceptive practices when dealers face no primary liability under the Dodd-Frank Act, and that the complaint improperly relies on an analysis of a few post-origination consumer complaints to suggest that Credit Acceptance acted knowingly or recklessly at origination (prior to accepting assignment of a contract).

We believe that the motion to dismiss articulates powerful arguments in opposition to the complaint, which we amplified in the amicus curiae brief we filed in support of the motion to dismiss. Our amicus brief explains that the complaint’s efforts to modify, through litigation, settled law that industry participants have relied on for decades is part of a longstanding CFPB pattern of regulatory overreach — “pushing the envelope,” in the words of the CFPB’s first director.

We argue:

(1) The complaint represents an end-run around the Dodd-Frank Act’s express exclusion of automobile dealerships from the CFPB’s rulemaking, enforcement, and supervisory authority.

(2) The complaint seeks to upend longstanding rules governing consumer credit disclosures, including those concerning the content of the required disclosures and the person responsible for providing them and ensuring their accuracy.

(3) The complaint attempts to circumvent express limitations on disclosure-related liability for assignees of consumer credit contracts.

(4) The complaint attempts to implement a major policy decision — the imposition of ability-to-repay requirements in the auto finance space — without an express statutory authorization (like those that exist in the mortgage and credit card contexts) or compliance with the m rulemaking channels for implementing such policy decisions.

The amicus brief further argues that the inevitable consequence of the plaintiffs’ actions in this case, if permitted to continue by the courts, would be a lack of transparency, the failure to gather necessary data and input from key industry stakeholders, and the potential for significant unintended consequences, including decreased competition in the auto finance space, higher financing costs, and a diminished availability of credit to entire categories of consumers. And, if permitted to proceed past the pleadings stage, the government’s theories could have widespread chilling effects in the auto finance industry and beyond.

We look forward to further developments in this case. Ultimately, of course, we hope to report on the vindication of Credit Acceptance and the court’s rejection of the complaint.

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