The Consumer Financial Protection Bureau or CFPB today announced the largest auto loan discrimination settlement in history to resolve allegations that Detroit-based Ally Financial Inc. and Ally Bank have engaged in an ongoing nationwide practice of discrimination against African-American, Hispanic and Asian/Pacific Islander borrowers in their auto lending since 2011.
The agreement is the first fair lending enforcement action by the Justice Department and CFPB, which Republicans and their Wall Street and banking cronies continue to fiercely resist for self interested reasons. However, in AutoInformed’s view this is not the strongest test case possible – in fact it’s weak. Ally is government owned, so the beleaguered Obama Administration with one of the worst Attorney Generals in recent times could have forced this settlement for political reasons. An Ally spokesperson refused further comment, and who can blame her given the politics of the situation, and ongoing abuse of Federal Government power as has been revealed in the latest NSA spying scandal.
The average victim paid between $200 and $300 extra during the term of the loan. (We know that averages are crude statistical tools, but is there really enough of difference here on the amount of the average auto loan made over the course of the loan? We think not, and it certainly isn’t actionable unless the government is holding a gun to your head so to speak.)
The Equal Credit Opportunity Act (ECOA) prohibits such discrimination in all forms of lending, including auto lending. Ally’s settlement with the DOJ, which is subject to almost certain rubber-stamp approval, was filed today in the U.S. District Court for the Eastern District of Michigan in conjunction with the DOJ’s complaint. Ally resolved the CFPB’s claims by entering into a public administrative settlement.
The settlement provides $80 million in compensation for alleged victims of past discrimination by the nation’s largest auto lender and requires Ally to pay $18 million to the CFPB’s Civil Penalty Fund. Ally also must refund discriminatory overcharges to borrowers for the next three years unless “it significantly reduces disparities in unjustified interest rate markups.” This system allegedly, will create a “strong financial incentive to eliminate discriminatory overcharges.”
The settlement resolves claims by Justice and the CFPB that Ally discriminated by charging approximately 235,000 African-American, Hispanic and Asian/Pacific Islander borrowers higher interest rates than non-Hispanic white borrowers. The agencies claim that Ally charged borrowers higher interest rates because of their race or national origin and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk.
Rather than taking applications directly from consumers, Ally makes most of its loans through more than 12,000 car dealers nationwide who help their customers pay for their new or used car by submitting their loan application to Ally. Ally’s business practice, as with most other major auto lenders, allows car dealers discretion to vary a loan’s interest rate from the price Ally initially sets based on the borrower’s objective credit-related factors. Dealers receive greater payments from Ally on loans that include a higher interest rate markup.
Justice and the CFPB claim this system of subjective and unguided pricing discretion directly results in Ally’s qualified African-American, Hispanic and Asian/Pacific Islander borrowers paying more than qualified non-Hispanic white borrowers do.
In a statement the auto lender said,” Ally does not engage in or condone violations of law or discriminatory practices, and based on the company’s analysis of its business, it does not believe that there is measurable discrimination by auto dealers.
“Regardless, Ally takes the assertions by the CFPB and DOJ very seriously and has agreed to the terms in the orders, which include enhancing dealer monitoring, reducing the perceived disparity for the protected classes outlined in the order, paying a civil money penalty of $18 million and contributing $80 million toward a settlement fund to be managed by an independent settlement administrator. Ally expects to take a $98 million charge in the fourth quarter related to these matters.”
See:
- Financial Protection Bureau Auto Loan Regulation Anti-Consumer Says NADAAsian Auto Lending Discrimination in Los Angeles?
- GM sells all of its Stock in Ally, formerly GMAC
- Ally Financial Pays Treasury $5.9 Billion, 70% of Taxpayer Debt
