By Jonathan Stempel

NEW YORK A federal judge on Monday put on hold a predatory lending lawsuit against Credit Acceptance Corp by the U.S. Consumer Financial Protection Bureau and New York Attorney General Letitia James, over objections from both regulators.

In staying the lawsuit, U.S. District Judge Jennifer Rearden in Manhattan cited a separate case before the U.S. Supreme Court over whether the CFPB's funding mechanism is constitutional.

A ruling against the CFPB could imperil actions by the consumer watchdog since it was created as part of the Dodd-Frank Act in 2010, in response to the global financial crisis.

The CFPB and James accused Credit Acceptance of driving low-income borrowers into used-car loans it knew they could not afford, with interest rates averaging 22%, and concealing the true cost of borrowing.

In one alleged instance, Credit Acceptance approved a $260-a-month loan for a mother of two who made just $950 per month, and whose vehicle ended up being repossessed twice.

The regulators argued that the CFPB's funding status had no bearing on whether their lawsuit could proceed.

But the judge said that while the public had an interest in seeing consumer protection laws enforced, "any potential harm to the public caused by delaying this action is outweighed by the benefit to consumers in proceeding in a streamlined fashion."

The CFPB declined to comment. James' office did not immediately respond to requests for comment.

A Supreme Court decision in the funding case is expected by next June.

Last December, another judge cited that case in staying a lawsuit by the CFPB and James against MoneyGram International over remittance transfers, which let people in the United States send money to family and friends elsewhere.

The case is Consumer Financial Protection Bureau et al v Credit Acceptance Corp, U.S. District Court, Southern District of New York, No. 23-00038.

(Reporting by Jonathan Stempel in New York; Editing by David Gregorio)