In the first joint fair lending action in the indirect auto lending context by the Consumer Financial Protection Bureau and the Department of Justice, Ally Bank and its parent, Ally Financial Inc., agreed to pay $98 million to settle charges of discriminatory lending in violation of the Equal Credit Opportunity Act. The settlement represents the federal government’s largest auto loan discrimination settlement in history and the third largest ever in a DOJ fair lending action.
An examination conducted from September 2012 through November 2012 revealed pricing disparities in the company’s portfolio for loans made to qualified African-American, Hispanic, and Asian and Pacific Islander borrowers, the CFPB said. Ally finances auto loans by setting a minimum interest rate at which it will finance or purchase a retail installment contract from a dealer based on the borrower’s objective credit-related factors. The dealer then has the discretion to vary the initial interest rate (or buy rate) within certain limits and receive a greater payment from Ally on loans that include a higher interest rate markup.
As compared to equally qualified white borrowers, African-Americans were charged approximately 29 basis points more in dealer markup; Hispanic borrowers were charged approximately 20 basis points and Asian and Pacific Islanders approximately 22 basis points more in dealer markup, according to the action. The CFPB shared its findings with the DOJ, which made similar findings based upon its own investigation of Ally’s pricing of automobile retail installment contracts.
Importantly, the agencies based their allegations on a disparate impact theory and did not claim that Ally intentionally discriminated against any borrowers. The company’s policy – while facially neutral – permitted dealers to set prices that resulted in qualified members of the three minority groups paying more for credit on average than similarly-situated white borrowers, the DOJ and CFPB contended.
“Whether or not Ally consciously intended to discriminate makes no practical difference,” Richard Cordray, director of the CFPB, said in a press release. “In fact, we do not allege that Ally did so. Yet the outcome, and the harm to consumers, is the very same here.”
Ally, one of the largest indirect automobile finance companies in the country (according to the DOJ and CFPB, the company works with roughly 12,000 dealers nationwide) also failed to monitor dealers for pricing disparities and neglected to provide dealer training in fair lending, the agencies said.
Pursuant to the final consent order between the parties filed in Michigan federal court, Ally agreed to pay an $18 million penalty and provide an additional $80 million dollars as a settlement fund for the roughly 235,000 borrowers identified by the agencies as having been subjected to the alleged discriminatory practices between April 2011 and December 2013.
The settlement also requires Ally to improve its monitoring and compliance programs intended to prevent future discrimination – including dealer education about the ECOA and the establishment of a dealer compensation policy that will limit the maximum spread between Ally’s buy rate and the contract rate. Ally agreed to conduct quarterly and annual analyses of retail installment contract pricing data for prohibited disparities resulting from Ally’s dealer compensation policy and promised to take “prompt corrective action” against dealers who trigger concerns regarding pricing disparities, up to termination of a dealer relationship.
Ally could be relieved of its compliance obligations under the order if it drops the traditional dealer markup model and moves to “a non-discretionary dealer compensation structure,” the CFPB explained, like using a flat rate per borrower.
The company released a statement that it “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.”
To read the consent order, click here.
Why it matters: The order reinforces that the auto lending industry is squarely on the CFPB’s radar. In addition to the Ally settlement, the agency previously released guidance for auto lenders in which it cautioned that indirect lenders could be liable under a disparate impact theory. The order and CFPB guidance demonstrate the government’s willingness to bring fair-lending actions against auto lenders even absent evidence of discriminatory intent. In addition, while the settlement does not require Ally to eliminate the practice of allowing dealers to mark up loans, it seeks to encourage auto lenders to implement a dealer compensation plan without discretionary dealer pricing. In the event that an auto lender or finance company continues to allow dealers to exercise discretion over the interest rates they charge consumers, the order serves as a strong reminder to maintain robust monitoring and compliance programs to prevent, or promptly remedy, any unlawful pricing disparities.