CFPB, DOJ Using Force to Change Auto Lending Industry

WASHINGTON — By assessing nearly $100 million in fines and restitution against Ally Financial on Friday, regulators sent a warning shot to all indirect auto lenders that they will be severely penalized if partnering dealerships charge higher interest rates or fees to minorities.

The action by the Consumer Financial Protection Bureau and the Department of Justice followed a controversial bulletin issued by the CFPB in March informing indirect auto lenders they would be on the hook for any intentional or disparate impact on minorities.

Since then, the industry and some lawmakers have repeatedly asked the CFPB to either justify or back away from that position, arguing it's hard to detect unintentional discrimination. But the action against Ally proved the CFPB has not changed its view.

"Whether or not Ally consciously intended to discriminate makes no practical difference to consumers," CFPB Director Richard Cordray said on a conference call on Friday. "In fact, we do not allege that Ally did so. Yet the outcome, and the harm to consumers, is the very same here."

Officials at the Justice Department, which has embraced the theory of disparate impact in multiple fair-lending cases, said during the same call that Ally was an example for all other indirect auto lenders.

"We recognize that Ally's dealer markup system described by Director Cordray is similar to those followed by many other auto lenders," said Jocelyn Samuels, the acting assistant attorney general for Justice's civil rights division. "We hope that the recognition of this issue by one of the nation's largest auto lenders will spur the rest of the industry to begin designing long-term solutions to address discriminatory pricing."

Regulators allege that Ally — which originally sets the interest rate on a loan when someone applies within a dealership — allowed the dealer to increase the rate substantially higher for minorities. Dealers are commonly paid through the interest rate gap but the order alleges that more than 235,000 minorities were charged significantly more than white borrowers since at least April 2011.

"The average African-American victim was obligated to pay over $300 more during the term of the loan, the average Hispanic or Asian Pacific Islander victim was obligated to pay over $200 more over the term of loan," Samuels said. "Today's settlement will address some of the practices that lend to this discrimination and we commend Ally for cooperating with the department and for its willingness to take steps to address the high risk for discrimination in the current auto lending system."

In a statement issued by Ally following the consent order, the company denied the allegations, saying it has a long history of evaluating the installment contracts that it purchased from dealers which did not show a borrower's race or ethnicity. Rather, it "sets pricing based solely on a consumer's creditworthiness and contract characteristics," the company said.

That is a common practice with many indirect auto lenders since dealerships cannot legally require an applicant to disclose race or ethnicity. As a result, both lenders and regulators use "proxies" to try to determine if borrowers are minorities.

"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," the company stated. "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 finances loans for more than 12,000 dealers. The National Automobile Dealers Association said in an emailed statement following the action that while it was "encouraged" the CFPB did not try to enforce a flat-fee system, it still questioned the agency's proxy methods for determining potential discrimination.

"Regrettably, in today's announced enforcement action, the CFPB continues to withhold the secret methodology it uses to determine whether unintentional discrimination has occurred," the dealer group stated. "The public still does not know whether the bureau takes into account legitimate factors that can affect finance rates — for example, a dealer's ability, regardless of race, to lower the interest rate to meet a customer's monthly budget. The CFPB's failure to reveal its approach is particularly troubling given the repeated and recent requests from bi-partisan members of both houses of Congress for this essential information."

CFPB officials have repeatedly said in response to lawmaker complaints that their proxy methodology mirrors what other federal regulators have long used in fair-lending cases — though the industry and lawmakers are still asking for details to the methodology.

"Allegations of discriminatory lending practices are deeply troubling, and therefore it is extremely important that we understand the methodologies and analyses used to reach this conclusion," a bipartisan group of 16 members of the Florida congressional delegation said Wednesday in a letter to Cordray. "With that in mind, we ask that the CFPB fully respond to all Congressional requests for the raw data and specific methodology used to determine the instances of 'disparate impact' and formulate the new guidance."

Still, it appears federal authorities are on the warpath to bring significant change to the indirect auto lender industry, particularly in making sure lenders monitor their entire portfolios and dealers for any potential for discrimination.

"This complaint is our first against a national auto lender, and we hope … that it will become a model and spur other industry action to address this pervasive problem," Samuels said. "As we've done in mortgage market, we are committed to routing out discriminatory practices in auto lending and ensuring that all consumers have access to this vital form of credit free from discrimination."