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Ida Phelps still can’t recall hitting the telephone pole. She remembers her car rolling down Branch Avenue past the Iverson Mall in Prince George’s County and thinking, “Oh my God, I’m going to die.” She woke up several hours later at Washington Hospital Center, where she had been delivered by helicopter. Phelps found stitches in her head and leg, and the bottom of her heel throbbed with road rash. The brakes on her 1989 Nissan Sentra had failed without warning on her way home from work in August 1997. She had tried to stop the car by dragging her foot on the pavement “like Fred Flintstone.” The crash left Phelps hospitalized for four days.

Phelps had suspected her car was a lemon from the get-go. The clutch needed replacing three times in the first two months she owned the car. Six months later, the car self-destructed completely. But, like the monstrous hunk of automobile in Stephen King’s Christine, it would come back to haunt her.

Phelps had financed the car through Credit Acceptance Corp. (CAC), a publicly traded corporation that specializes in lending to people with damaged credit. Khalsa Motors, a used-car dealer in Clinton, Md., had told Phelps that financing her car through CAC would help mend her bruised credit, so in early 1997, she plopped down a big chunk of cash for the Sentra—$767.75—and financed almost $7,000 more at 22 percent interest. The exorbitant financing package meant that Phelps owed more than $8,000 for an 8-year-old car valued by the Kelley Blue Book at only $3,000 in pristine condition. Phelps says she knew it was a bad deal. “The only reason I went there was because I needed transportation,” she says. “If my credit wasn’t bad, I would have never gone there.”

Phelps stopped payments on the loan after the accident—the car was totaled, after all—but she quickly came to know the efficiency of CAC’s well-oiled collections machine. First came the calls, then threatening letters, and finally notice that the company intended to sue her. Phelps never attended the court hearing, where a default judgment was entered against her for the balance of the loan, plus attorney’s fees and interest. Before she knew it, CAC was garnishing her wages, taking $250 to $300 out of every paycheck, depending on overtime.

“I didn’t think it was fair, since I didn’t think it was my fault,” says Phelps. Indeed, when the car dealer assigns sales contracts to CAC, the company also becomes liable for problems the customer has with the car dealer under federal lending laws—Phelps’ contract even included a notice describing her rights. But, like a lot of people who are stressed financially, Phelps never sought legal help. In August of last year, she was forced to file for bankruptcy protection to prevent CAC from continuing to take a quarter of her modest bookkeeper’s salary for a long-dead car.

You could say that Phelps’ troubles are merely comeuppance for financial irresponsibility, the obvious consequences of ignoring her personal credit rating. Or maybe you’re thinking she was just naive to borrow $8,000 for a car probably worth $1,500—caveat emptor and all that. Or perhaps the notion of being desperate enough to pay through the nose for a rolling crap box seems like mythology. But for thousands of working-class residents all across the country, it is as real as rush-hour gridlock. And thanks to CAC and companies like it, many of the traditional outlets for buying inexpensive used cars have been converted into money-lending sites, places where financing always comes first and the car is just an extra.

A random survey of court files across the Washington region shows that Phelps is but one of hundreds of area residents who have found themselves in dire financial straits after buying cars financed through CAC. In Prince George’s County, CAC has filed more than 1,000 lawsuits against its customers since 1993. Virginia’s Prince William County courthouse has been flooded with more than 800 suits filed by CAC since 1994. In Arlington County, there have been 104 suits just since January 1998. And in D.C., CAC has sued more than 500 people since 1995. Not all those people can be suckers. Many of them are just people who needed a car to get to work and instead got a bucket of junk, onerous loan terms, and a voracious bill collector on their tail.

Brett Roberts, chief financial officer of CAC, doesn’t see it that way. “CAC’s financing programs provide dealers with an opportunity to extend credit to customers who possess limited access to traditional sources of consumer credit—consumers that other finance companies avoid,” he says.

Instead of unhappy customers, Roberts points to “countless letters of gratitude from these consumers who, because of CAC’s willingness to provide funding, were able to purchase a reliable automobile, reestablish their credit rating and consequently move their lives in a positive direction.”

Given the huge volume of business CAC does—nearly $1 billion in sales contracts a year—the number of lawsuits may not be that high. But a growing number of consumer advocates say that CAC’s financing encourages used-car dealers to sell junk cars at inflated prices—virtually ensuring that people will default on the loans. “They’re selling the right to sue you,” says lawyer Bryan Kemnitzer, who has filed a class-action suit against CAC in Los Angeles alleging deceptive and unfair trade practices. “They expect probably a 90 percent default rate. What it does to people’s lives is really cruel.”

In the 1980 movie Used Cars, Kurt Russell plays Rudy Russo, the stereotypical back-lot hustler. In the opening scenes, a leisure-suited Russo is preparing for a day of work by re-attaching car bumpers with bubble gum, rolling back odometers, and touching up a yellow cab with blue water-based paint. Fast-talking and oily-smooth, Russo has no trouble convincing people on the lot to buy his “pre-owned” cars. That’s easy, he tells a colleague: “Just get ’em in that car. Nothing sells a car better than the car itself.”

Russo’s big problem is the problem of small used-car dealers everywhere: getting customers where the cars are. With a rusting inventory of Buicks and Chevy Novas, Russo occasionally has to bait a fishing pole with a $20 bill to lure in customers from his competitor. If that doesn’t work, there are always the time-tested ads featuring buxom broads to bring in the crowds. “I can’t sell a car unless I get ’em on the lot,” Russo complains to his boss.

Donald A. Foss solved Russo’s problem. As founder and CEO of CAC, Foss discovered in the late ’80s that easy financing would get more people on a guy’s dusty lot than tits and twenties combined. A second-generation used-car salesman, Foss was intimately familiar with Russo’s lot problems. After skipping college in favor of a paint-selling job, Foss opened his first used-car lot in Detroit in 1967. Before starting CAC, he was most famous for his late-night TV ads featuring a guy in a clown suit.

In 1973, Foss founded CAC to collect on sales contracts and arrange financing for his growing number of car lots. Eventually, CAC started doing collections for other dealers, and gradually, it began offering full-fledged financing. A short, rotund man, Foss is considered a pioneer in the world of used cars. His system of dealer financing helped revolutionize the used-car market by finding lucrative revenue streams in areas traditional banks had avoided—people with bad credit and old cars.

CAC will finance almost anybody. It has special programs for people on welfare and disability, people in bankruptcy, even teenagers. The “Don Foss Program” also allows dealers to sell old cars they would otherwise have to wholesale. “Make wholesale retail,” CAC’s training videos sing. By financing the sale of old, low-end cars to high-risk borrowers, CAC can charge the highest interest rates allowed by law. In states like Maryland, the rate can go as high as 27 percent on a 10-year-old car.

When Foss got started, the “sub-prime” market of bad credit risks was huge and largely untapped. As the CAC Web site points out, 50 percent of used-car customers don’t qualify for traditional auto loans. Larry Parker, manager of the Michigan Vehicle Acceptance Corp. and the sub-prime lender for the Michigan Automobile Dealers Association, says Foss’ financing system has been a boon to what Parker calls “credit criminals” who formerly had few options for car financing. “He was there to take care of them,” says Parker.

Of course, lending money to people with bad credit and financing cars that might not outlive the loans is risky business. That’s why regular banks veer away from sub-prime customers. To minimize the company’s risk, Foss set up a system known as “deep-discount” financing, whereby CAC advances dealers only a portion of a car’s sale price. It then bundles together that dealer’s loans, and only when those loans are paid off to a certain level does the dealer get any more payments—minus the 20 percent that goes to CAC.

The company also developed a highly aggressive collections program to go after people who ultimately default, as many, many do. In filings with the Securities and Exchange Commission, CAC has estimated that roughly 35 percent of its customers default on their loans. But there’s evidence to suggest that the rate has been much higher in some places. A class-action lawsuit has forced the company to admit that for several years running, its default rate in Missouri hovered near 80 percent. “It’s set up to make money no matter what the default rate,” says Bernard Brown, the lawyer who brought the Missouri suit.

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Indeed, CAC’s system has proved highly profitable. In 1992, Foss took the company public, successfully pitching it to stock analysts who proclaimed it a winning proposition. Michael Corasaniti, a New York analyst for Alex, Brown & Sons Inc., told the Wall Street Journal not long after the company’s second public stock offering that CAC’s system worked “better than any other model I’ve ever seen in high-risk lending.” By 1996, CAC’s stock price had soared from $2 to $27 a share, launching Foss on to the Forbes 500 list as one of the country’s richest men, worth $550 million. In 1996, financial analyst Frank Glasher gushed to the Detroit News that “[CAC] shareholders are making out like bandits. This company’s performance has a ballistic upswing.”

Foss’ success gave CAC dealer-training seminars the drawing power of cult meetings. Dealers all over the country paid nearly $5,000 to learn Foss’ secrets and maybe get a glimpse of the dealer-turned-financier, who did not return calls for this story. Larry Lee Leudeman, a car dealer in Ohio and now a CAC exec, said in a consumer lawsuit against CAC in Ohio last year, “This is a man that made it good where others tried and failed. He’s a legend in his own time.”

With Wall Street money, what had begun on a Detroit used-car lot became an $85 million company with a presence all over the country and in the United Kingdom. Suddenly people who had been dissed by regular dealerships and banks were being courted nationwide by dealers who used Foss’ techniques to reassure them that bad credit was not a problem, at least not with CAC.

Foss immortalized his sales genius in training videos developed for CAC-affiliated dealers (Washington City Paper viewed the tapes at the U.S. Copyright Office). The low-budget productions feature a CAC executive standing in a classroom full of car dealers, exhorting them, “People who have bad credit are just good people who had something bad happen to them.”

The videos preach psychotherapy as much as smart sales techniques. To reassure customers wary of yet another credit rejection, the videos and training manuals suggest using the “CAR” system: Confession, Absolution, Redemption. Play the confessor, the tapes say: “Listen. Let the customer get their problems off their chest.” Dealers are encouraged to nod and coo while customers pour forth tales of woe about bankruptcy, divorce, and unemployment. Once the customer has “confessed” his bad-credit sins, the dealer gives him “absolution”—the good news that he can in fact buy a car. “Redemption” comes when the car is delivered.

Central to the success of the program is the dealers’ understanding that these customers have no other options. “They will buy just because you have something they can get,” the tapes say.

Cruise through Arlington, past some of the tiny car lots on Wilson and Clarendon Boulevards advertising “no credit, no problem,” and chances are, you’re looking at CAC-affiliated dealerships. Free Auto Mart circulars are filled with pages and pages of CAC-linked dealers like Checkered Flag in Woodbridge, which insists, “Your job is your credit!”

Others, like Hill & Sanders Ford in Wheaton, are kind enough to include a fax form in ads so customers can have their credit checked even before they visit the lot. Some used-car ads in the Washington Post classifieds don’t even list the dealer’s name. One recent classified listed only a phone number and the promise “If you work, you ride. We finance everyone.” The dealer turned out to be Ports Town Motors, a CAC affiliate in Prince George’s County.

Rarely do the ads actually promote cars. But that’s because many independent used-car dealers don’t really sell cars anymore. “The worst thing you can do is sell cars,” CAC teaches dealers in its videos. “We don’t sell cars. We sell financing.”

Kick a tire at Eastern Motors in Woodbridge and you’ll see the difference. Tucked in a valley among check-cashing joints, Thrift World, and a half-dozen other used-car dealers along Route 1, Eastern Motors doesn’t advertise in the Post. It does, however, fill the weekend airwaves on WKYS, promising mostly black listeners, “If you don’t qualify for financing, we’ll give you the car!”

With a few sport utility vehicles and a line of Geo Metros and other sensible cars on display, Eastern Motors looks a lot like any other car dealer, except for one big thing: There’s not a price tag in sight. Not a single windshield features the classic “$1999—Like new!” When I asked the price of a silver Mitsubishi Eclipse one day last month, a salesman responded, “Those are about $12,000 or $13,000, depending on how much [financing] you qualify for.”

While I was looking at cars at Eastern Motors, no one talked up the Eclipse’s state-of-the-art fuel injection or the safety benefits of an SUV. No one offered me a test drive. A salesman did, however, offer to do my taxes so I could borrow against any future refund for a down payment. And I was informed that a Jeep Cherokee came with a “full package,” which I assumed to be the warranty advertised in the office from Wynn, a company that a CAC executive said in an Ohio lawsuit last year was likely to cover everything on your car—except the parts most likely to break down.

When I visited Eastern Motors, the lot was deserted. Not a soul was examining suspension systems, testing out bucket seats, or looking under hoods. Inside, though, Eastern’s tiny office was packed with customers sitting on couches, watching videos, and filling out “information sheets” used to check their credit. (The term “application” is verboten by CAC because it tends to scare people off if they’ve been rejected for loans in the past.)

While residents of Woodbridge and the surrounding Prince William County are nearly 85 percent white, all eight people milling around waiting for help or filling out paperwork in Eastern Motors when I visited were black. A young couple with a toddler was filling out a form when a salesman ambled over and told them he needed their down payment before their application could be processed, “to show them you’re legit,” he explained. The looks on their faces immediately changed from bored to baffled.

The line about the down payment comes right out of the CAC training materials, which advise dealers to get money from people before they even test drive a car. “Simply hold out your hand and ask for it,” the tapes say. “Usually, the customer will give you the money the first time.”

The test drive, according to CAC training materials, is mainly to protect the dealer against lawsuits. When offering a test drive, CAC trainers remind, “It is important to keep in mind we sell financing, not cars. Present the car by showing the customer where things are, but don’t get involved in selling the features. The customer will likely have questions about the car. Return to the financing answer when responding to the questions.”

Hooking a customer on a sweet Jeep Cherokee or another top-shelf vehicle is a risky proposition for a finance salesman, according to CAC training tapes, because in all likelihood, the customer will only qualify for a Geo Metro. “Selling the car will make it harder to re-select [a less expensive car],” the tapes explain. If the customer is disappointed with the Metro, CAC urges dealers to remind him that financing will help “re-establish” his credit, at which point he can come back and get a better car. “Always come back to the financing,” the tapes exhort.

Although Eastern Motors may be doing a fine job of selling financing, some of the cars it has sold leave something to be desired, according to consumer advocates, lawsuits, and two people who’ve bought them. Take Montrell Cole. He bought a 1990 Geo Prizm in January 1997 from Eastern Motors at its old Arlington location. He paid $1,000 down and financed another $6,300 at 18 percent interest. As soon as he drove it off the lot and pushed it above 50 mph, the whole car began to shake violently. Cole immediately took the car to an auto shop, where he says the mechanic told him the car wasn’t worth more than $500. Cole says the mechanic told him the car had been totally destroyed and put back together with the structural equivalent of baling wire and gum. Cole says he tried to return the car that night, but Eastern refused to take it back.

Cole says he was stuck with a car that was in constant need of repairs. One day while he was driving with his two young children on the freeway, one of the back wheels just fell off. “It almost killed us,” he says. When he tried to fix the tire, he discovered that the spare had a broken rim, and the jack was broken as well. Before the year was over, the car went to a towing yard. “We couldn’t afford to keep it,” says Cole, who stopped payments on the loan. According to court records, CAC never bothered to repossess the car, which was supposedly worth $7,000. However, the company promptly sued Cole, and in September of last year it secured a judgment against him when he failed to show up in court. According to court records in D.C. and in P.G. County, Cole is only one of many Eastern Motors customers who have defaulted on their CAC loans in recent years.

Investigators with the Arlington County Consumer Affairs Office say they are well-acquainted with Eastern Motors. A consumer affairs investigator says the office has received 21 complaints in the past two years about Eastern, although she says that number doesn’t mean much without the context of how much business the dealer does. The Better Business Bureau, though, has given the company an unsatisfactory performance record on the basis of a pattern of consumer complaints that the dealer sold cars in poor condition and cars that had not been inspected, and that the company would not honor its warranties. In the past three years, the bureau has had 10 complaints against Eastern (which also does business as the Auto Toy Store in Arlington).

CAC’s Roberts says it doesn’t do business with shady car dealers. “It is understood that there are automobile dealerships who have made a practice of taking advantage of individual consumers. CAC makes every effort to identify these dealers and eliminate them from our program,” he says.

Kathleen Keest, a nationally known consumer credit expert with the Iowa Attorney General’s office, says bad cars and bad loans go hand in hand. She says, “The highest default rate usually comes from the dealers who sell the crappy cars.”

Indeed, CAC has said in filings with the Securities and Exchange Commission (SEC) and in an Ohio lawsuit that the main reason people default on their loans is that their cars die. It argued in the Ohio suit that dealers who assign sales contracts to CAC sign pledges that they have complied with all state and federal laws relevant to the transaction. While independent used-car dealers have always been a source of consumer complaints, Keest believes that financing programs like CAC’s exacerbate the abuses by encouraging dealers to sell the worst possible cars and to gouge prices. She calls this system of financing “sucker pricing.” Here’s why:

Say a dealer wants to make $500 on a car that cost him $2,500. If he sells it for cash, he merely sets the price at $3,000. If he sells the car for $3,000 using CAC financing, he’s out $1,000 of $2500 because CAC usually advances him only half the price of the car to hedge against the risk of default. But if the dealer instead charges $6,000, the CAC advance covers his costs and gives him $500 profit up front. Even if the customer defaults on the loan, the dealer still makes money. Any payments after that are just gravy.

Charging more for a car because it is bought on financing rather than with cash is illegal under the federal Truth in Lending Act. But CAC trains its dealers not to put price tags on the cars, only “suggested down payments,” which can be adjusted according to customers’ financing potential or cash on hand. CAC training videos are careful to stress that dealers should not seek more than $500 in profit per car, because otherwise they push up the risk of default. In practice, however, it’s clear that some dealers are doing just that.

According to records in P.G. County Court, one D.C. government worker bought a 1992 Mazda van from Eastern Motors in 1996. With 18 percent interest and a $3,500 cash down payment, she would have paid $21,449. The owner quickly defaulted on the loan, and CAC repossessed it eight months after she bought it. According to court records, the van required $2,000 worth of repairs before it could be sold at auction, where, although it was supposedly worth $16,000, it fetched a paltry $7,500. That means Eastern Motors didn’t just double the price of the van—it nearly tripled it.

Robert Bassam, the owner of Eastern Motors, was out of the country and could not be reached for comment. But manager Sam Tisi says the dealership has changed its sales staff and its inventory so that almost all the cars on the lot are models built in 1995 and after. Some are even under factory warranty, he says, because they are low-mileage. He says the cars he sells are inspected as required by Virginia law: “The customer knows what they’re getting. They take a test drive.”

Tisi says the customer complaints are not reflective of Eastern’s practices—especially since it moved to Woodbridge a year and a half ago. “We have, out of 200 customers, only five who complain—that’s harmless,” says Tisi. People come to Eastern with four or five repossessions under their belt, explains Tisi, who says it’s no surprise that sometimes they default again.

CAC’s Roberts says it’s in the interest of everyone that both the car and the loan perform. “Credit Acceptance Corporation’s financing programs do not encourage car dealerships to ‘gouge’ consumers. Unlike many of our competitors, the dealer’s potential up front funding is limited to a percentage of the Kelley Blue Book or the N.A.D.A. Official Used Car Guide value of the vehicle being purchased. Unlike traditional finance programs, a portion of the dealer’s profit is tied directly to the performance of the installment contract,” he says.

When James C. Humper Jr. went to Eastern Motors in 1995, he wanted to trade in his 7-year-old BMW for a 300ZX. Lured by radio ads promising easy credit, Humper spent a grueling four hours at the dealership filing out paperwork that he never really understood. In the end, he didn’t get his 300ZX. Instead, he drove away in a 1988 Acura Legend with a bill that would top $15,000 at 20 percent interest over the three-year life of the loan. Humper says the Eastern salesman promised that he could come back in six months after he established his credit. Then, he could have any car he wanted.

On his maiden voyage in the Legend, Humper and a friend drove out Washington Boulevard and rolled down the windows to take in some fresh air. As they got on to I-395, it started to rain. When Humper tried to roll up the windows, they wouldn’t budge. Next thing they knew, the sun roof sprang a leak, the windshield wipers conked out completely, and the car started chugging as if it was about to stop running.

As soon as he got home, Humper called Eastern Motors to tell them that the car he had just bought was falling apart before his eyes. He wanted his BMW back. The salesman agreed but said he needed the owner’s approval to cancel the sale of the Legend. For the next month, every time Humper tried to contact the owner, he says Eastern salespeople told him the owner was in the Bahamas.

With the car undrivable and the temporary tags expired, Humper became a slave to public transportation. Commuting from D.C. to his job in guest services at the Crystal City Best Western, Humper often worked long after the Metro quit running and frequently had to take a cab home. Finally fed up, one day Humper jump-started the car and drove it back to Eastern Motors, where salespeople promised to fix it.

A week later, when Humper called to see if the Legend had been fixed, he learned that CAC had repossessed it and sold it without notifying him. Eastern had never even given him a title to the car. And the dealer told Humper that his old BMW was long gone. Outraged, Humper sought help from the Arlington County Consumer Affairs Office. Eastern Motors never responded to its inquiries, so Consumer Affairs closed the file. Humper then contacted Northern Virginia Legal Services, which helped him file suit against both CAC and Eastern Motors, alleging fraud, breach of contract, numerous violations of consumer protection laws, and illegal repossession and sale of Humper’s car.

The case dragged on for a year and a half, and Humper sank innumerable hours into the effort, missing work while he commuted by bus and train to Seven Corners for lawyers’ conferences. Finally, in the summer of 1997, Humper agreed to settle after his lawyer told him that they were outgunned and he would probably end up having his wages garnished or filing for bankruptcy protection if he didn’t.

Humper didn’t get a dime, nor did he get either of his cars back. The settlement did relieve him of his $6,000 debt to CAC, but the company never fixed his credit report. Consequently, he now drives his dad’s car because he is unable to finance his own. “I got nothing except losing two cars and bad credit,” says Humper. “I trusted the system. I think I have been ripped off big time.”

Although Humper may think he got a raw deal, his is actually one of the happier endings among people who stopped paying CAC because their cars died or because of onerous loan terms. Court records in P.G. County show that out of the thousand or so people sued by CAC over the past several years, only a handful engaged a lawyer to defend them, and that was often because they had filed for bankruptcy. Of course, if you can’t afford a decent car, a good lawyer to represent your interests is probably out of the question.

Options for low-cost legal defense in such cases are limited since Congress gutted the Legal Services Corp., and private consumer attorneys are hard to come by. Virginia attorney Paul Barnett, who successfully sued CAC last fall, says even if lawyers are successful, judges won’t award them legal fees because the cases involve relatively little money. As a result, he says, “It’s difficult to find lawyers to take on that kind of work.”

Mark Steinbach, a D.C. consumer lawyer who does handle such cases, says that by the time people contact him, often CAC has already gotten a default judgment against them. By then, says Steinbach, all he can do is help the clients file bankruptcy—a last resort that used-car dealers are lobbying Congress to eliminate.

And if CAC repossesses your car without telling you, don’t expect much help from state regulatory officials. Over the past decade, states have pared their consumer protection services to the bone. Virginia’s few remaining consumer affairs offices have no enforcement power to demand that dealers and finance companies play fair. Prince George’s County has no consumer protection office at all.

Lilly Freeman, a mediation supervisor with the Maryland State’s Attorney Consumer Protection Division, says her office had one claim filed against CAC three years ago, but it was mediated. She says such complaints are usually referred to the consumer finance office. But Michael Jackson, in the Maryland Department of Consumer Finance Regulation, says he has had few complaints about the company. “These are dealer problems,” he insists, reflecting a common sentiment that CAC is just an innocent bystander in the used-car world.

Yet people who do manage to challenge CAC’s suits against them have had some success. In half a dozen lawsuits filed against CAC in Arlington in the past several years, lawyers have successfully raised allegations of illegal repossessions, failure to provide notice of loan deficiencies as required by law, and violations of consumer protection laws. Similar allegations can be found all over the country, from California to Connecticut, where lawyers have filed dozens of lawsuits against CAC alleging exactly the same practices.

Nonetheless, in most cases, CAC is the one suing, and its largely working-class customers don’t even show up in court, leaving CAC the victor by default. Frank Johnson, the chief attorney with the metropolitan Maryland office of the Legal Aid Bureau, says default judgments give CAC the right to repossess cars, put liens on houses, and garnish wages to collect loan balances—even if the cars died 2 yards from the dealer’s lot. “If you’ve got a family of three or four living on $1,000 a month, [CAC] can take 25 percent of that,” says Johnson.

CAC’s customers often face a tricky situation, because the law entitles consumers to quit paying for a car if the dealer sold it in unsafe condition or violated any Truth in Lending Act provisions. But rather than getting their cars fixed or down payments refunded, consumers who stop paying usually end up getting sued and having their cars repossessed. As a result, Barnett says, “There are a lot of laws on the books, but in many cases they’re not meaningful because they’re hard to enforce.”

In 1996, Missouri consumer lawyer Bernard Brown saw the futility of taking on individual clients who had been sued by CAC and organized a class-action suit against the company. He recently scored a major victory for consumers who had bought cars from CAC-affiliated dealers. In August, a federal judge in Kansas City ordered CAC to wipe out court judgments against thousands of its customers and to correct their credit reports after finding that the company had systematically overcharged them for interest on court judgments.

Brown estimates that the ruling, a rare summary judgment that occurred even before the case went to trial, amounts to about $8 million in liability for CAC. CAC is appealing the ruling, which has delayed the beginning of the trial, originally slated for January. The trial, which may start sometime in April, will settle other allegations: that CAC overcharged customers for fees it claimed were paid for sales tax, title transfers, and other transactions, and that CAC illegally repossessed and re-sold dozens of customers’ cars.

In the hands of a sympathetic jury, CAC’s liability could climb much, much higher than

$8 million—a fact the company acknowledges in SEC filings. “They’re cowboys. What you’d really like to do is go after them for loan sharking,” says Brown, who says his case is proceeding along less sexy lines. “The money comes from poor people. If the money had come from middle-class people this would never have gone so far.”

While consumer litigation has failed to make much of a dent in CAC’s business, the stock market has been less forgiving. In early 1997, the market for sub-prime used-car loans bottomed out. Too many other companies had jumped in, hoping to repeat CAC’s success, forcing the company to make riskier loans with higher default rates. Two big sub-prime lenders went bankrupt. Mercury Finance, one of CAC’s largest competitors, was raided by the FBI in 1997 amid allegations that the company had inflated its profit statements in stock prospectuses.

CAC’s stock fell along with the others, but not terminally. The problems were compounded in 1997 when the company issued a press release stating that new accounting practices had revealed a loss of $27 million. The news sent CAC’s stock plummeting by 38 percent.

Unlike the average CAC customer, CAC shareholders wasted no time in retaining legal counsel. They filed suit against Foss and his associates, alleging that CAC had been grossly overstating its earnings by failing to keep enough cash reserves to cover the bad loans it was making. They also alleged that CAC had conned analysts from major brokerage houses into giving its stock wings, and that the corporate leadership, including Foss, had fraudulently inflated the value of the stock and failed to disclose the risks it was taking in financing junk-car sales.

Stockholders argued in the suit that Foss had known the company was on thin ice, pointing out that he had sold an unusually large portion of his stock in the company for $60 million not long before the price plummeted. Foss did not return calls for this story, and CAC vice president Brett Roberts would not comment on pending litigation. A lawyer for the shareholders, Lionel Glancy, says the company has asserted that the stock price fell because of the glutted sub-prime market and that it hadn’t known about the problems with the junk cars. But the shareholders’ suit alleges that Foss and others knew exactly how the company was run, because Foss was still running his own used-car lots in Akron, Ohio, under the name Larry Lee’s Auto Finance Centers.

In 1996, according to news accounts and the shareholders’ suit, a group of Ohio consumers sued CAC and Larry Lee’s for selling junk cars and soliciting down payments that exceeded what the dealer had paid for the cars. The suit described a bait-and-switch scam in which the dealership would get cash down payments from customers who thought they were buying one car and ended up with another, much less valuable one—a practice seemingly encouraged in CAC’s training videos. (The videos were introduced into court under seal, even though they are publicly available at the U.S. Copyright Office in D.C.)

The case was settled for an undisclosed sum, and a confidentiality order bars the plaintiffs from talking about the suit. Before the suit was settled, though, Larry Lee Leudeman, former president of Larry Lee’s Auto Centers, testified that he had warned Foss about the quality of the cars they were selling. “You sell cars that have bad transmissions, people ain’t going to pay for them….If a customer doesn’t have transportation—good, decent transportation—they’re not going to pay,” he said in a deposition.

But Leudeman testified that Foss had ignored his warnings and encouraged the dealers to sell junk cars to increase profitability and to load up the sales contracts with warranties and service contracts, despite the fact that he knew the warranties wouldn’t pay for most claims. “We always sold the sizzle before the steak….We sold financing. This is what our whole thing was. The cliché is, sometimes the car was a bonus,” said Leudeman.

The notion of selling people on “re-establishing credit” was also just a ruse, according to Leudeman. He said in deposition that, at least in its early years, the company almost never reported customers’ payments to the credit bureaus, although it did report their defaults. CAC hired Leudeman at its Michigan headquarters shortly after the Akron suit was settled, so he may be more chaste in further characterizations of the company’s business practices.

Despite the mountain of litigation against CAC, the company is on the rebound. Foss was recently able to securitize a pool of the used-car loans and sell them on the open market like bonds, giving CAC a brand-new infusion of cash to continue its operations. CAC’s stock price has rallied, and the company finished 1998 showing a net profit of $25 million. With the average new car running $22,000 and with more than a million people filing for bankruptcy protection last year, the market for ready credit and used cars has never looked better. Foss will remain a rich man. Even if his company ultimately fails under the weight of all the lawsuits, with $60 million in the bank and the protections that come with corporate status, Foss’ credit will not be impaired. It will be another seven years before Ida Phelps can say the same.