The Consumer Financial Protection Bureau and Department of Justice recently entered into a Consent Order with an automobile finance company for alleged violations of the federal Equal Credit Opportunity Act, 15 U.S.C. §§ 1691 (ECOA), arising from the auto finance company’s policies and practices allowing car dealer discretion for interest rate markups.

A copy of the consent order is available at: Link to Consent Order.

A copy of the related DOJ complaint is available at: Link to Complaint.

In connection with sales of cars on credit, car dealers frequently submit credit applications to auto finance companies on behalf of their customers.  The auto finance company sets minimal interest “buy rates” for approved sales contracts that it will buy from car dealers, and informs the dealers of these buy rates.  Auto finance companies often provide car dealers with discretion to mark up a consumer’s interest rate above the buy rates for certain types of transactions, and the finance company compensates the car dealer for the expected increased interest revenue to be derived from the dealer markups.

The CFPB and DOJ alleged that the finance company caused race and national origin discrimination in violation of the ECOA and its implementing regulation, Regulation B, 12 C.F.R. Part 1002, by allowing car dealers to include interest rate markups not based on the borrower’s creditworthiness or other objective criteria related to the borrower risk.

The CFPB and DOJ further claimed the auto financer’s policy and practice of allowing this discretion, and by compensating dealers for the dealer markups without adequate controls and monitoring, was not justified by legitimate business needs that could not be reasonably achieved by means that were less disparate in their impact on protected groups.

The Consent Order noted the DOJ and the CFPB used a Bayesian Improved Surname Geocoding (BISG) method based on geographical and name census data to show alleged interest rate disparities of 36 basis points higher than similarly situated white car buyers for African-American car buyers, 28 basis points for Hispanic car buyers, and 25 basis points for Asian and/or Pacific Islander car buyers.

The Consent Order further asserts that the auto finance company did not monitor whether prohibited discrimination occurred for dealer markups, and did not employ adequate controls to prevent discrimination.

In addition, the Consent Order asserts that the policy and practice of allowing dealer markups without adequate controls and monitoring was not justified by legitimate business needs, and resulted in illegal discrimination on the basis of race and national origin.

Among other things, the Consent Order requires that the auto finance company:

  1. not engage in race or national origin discrimination in any aspect of dealer discretion in automobile credit sales pricing;
  2. implement a dealer compensation policy conforming with one of three described options to ensure compliance with the ECOA;
  3. make submissions for review by a compliance committee;
  4. deposit $24 million for redress to affected consumers and create a plan for remuneration; and
  5. retain business records for five years demonstrating compliance.

The Consent Order further released and discharged the auto finance company from all potential liability in the consent order, and the auto finance company was not assessed any monetary penalties.