Why it matters

In what the government calls its first ever discrimination settlement involving “buy here, pay here” auto financing, the Department of Justice (DOJ) and North Carolina Attorney General reached a deal with two used auto dealerships. The federal government alleged that the two dealerships violated the Equal Credit Opportunity Act (ECOA) by “intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases,” while the state AG added claims based on North Carolina’s Unfair and Deceptive Trade Practices Act. Pursuant to the settlement agreement, the two dealerships must, among other things, revise the terms of their loans as well as their repossession practices. Specifically, the dealerships must omit hidden fees from the required down payment, are prohibited from repossessing a vehicle until the borrower has missed at least two consecutive payments, need to provide “better quality” disclosure notices at the time of the sale, and establish a $225,000 fund “to compensate victims of their past discriminatory and predatory lending.” Auto lending—already squarely on the radar of the Consumer Financial Protection Bureau—is an area of focus for the DOJ and state AGs as well. “Combating discrimination in all segments of the auto lending market is, and will remain, a top priority for the Civil Rights Division,” Acting Assistant Attorney General Vanita Gupta of the DOJ’s Civil Rights Division said in a statement, adding that she hopes “that other buy here, pay here dealerships will evaluate their practices in light of this settlement.”

Detailed discussion

In January 2014, the DOJ and the State of North Carolina brought suit against two used car dealerships: Auto Fare Inc. and Southeastern Auto Corp. The “buy here, pay here” dealerships allegedly engaged in “reverse redlining,” intentionally targeting African-American customers for unfair and predatory credit practices in violation of the ECOA and North Carolina’s Unfair and Deceptive Trade Practices Act.

Specifically, the authorities said that from 2006 to 2011, the sales prices, down payments, and interest rates offered by the two dealerships were disproportionately high as compared to other subprime used car dealers. Auto Fare and Southeastern failed to meaningfully assess the creditworthiness or ability to repay of customers, resulting in disproportionately high rates of default and repossession. The dealerships also engaged in repossessions when customers were not in default, the DOJ and state AG claimed.

In addition, the owner of both dealerships, Zuhdi A. Saadeh, allegedly made derogatory and racist comments about potential borrowers, suggesting that he “was interested in African American customers because he perceived them to be of inferior intellect and have fewer options for credit,” according to the complaint.

A federal court judge in North Carolina denied the defendants’ motion to dismiss the suit last June. The parties then reached a deal.

Pursuant to the settlement agreement (which still requires court approval), the dealerships are enjoined from engaging in any act, policy or practice that discriminates on the basis of race or color in any aspect of credit transactions, and must implement several new written policies and procedures to halt their allegedly predatory behavior. Required changes range from limiting projected monthly payments to no more than 25 percent of a borrower’s income to prohibiting hidden fees on top of the required down payment to prohibiting repossessions until at least two consecutive payments have been missed.

In addition, Auto Fare and Southeastern must keep interest rates at least five percentage points below the state’s rate cap and use a lower interest rate for borrowers who have specified evidence of lower credit risk, provide down payment refunds to borrowers who quickly go into default, allow borrowers to obtain an independent inspection of the car before completing the purchase, and improve the notices provided to borrowers before repossession.

Competitive sales prices and better disclosures at the time of sale—including information about the presence of any GPS or automatic shutoff device in the vehicle—as well as strict compliance with state repossession law, are also included in the deal.

Auto Fare and Southeastern must pay $225,000 for a settlement fund intended to compensate “victims of their past discriminatory and predatory lending,” the DOJ and AG said.

To read the consent decree in U.S. v. Auto Fare, Inc., click here.