The Department of Justice and the Consumer Financial Protection Bureau (CFPB) today announced the federal government’s 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 pattern or practice of discrimination against African-American, Hispanic and Asian/Pacific Islander borrowers in their auto lending since April 1, 2011. The agreement is the first joint fair lending enforcement action by the department and CFPB. With this agreement, eight of the top 10 largest fair lending settlements in the department’s history have been under Attorney General Eric Holder’s leadership.
The settlement provides $80 million in compensation for victims of past discrimination by one of the nation’s largest auto lenders 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 will create a strong financial incentive to eliminate discriminatory overcharges.
“With this largest-ever settlement in an auto loan discrimination case, we are taking a firm stand against discrimination in a critical lending market,” said Attorney General Eric Holder. “By requiring Ally to provide refunds to those who are overcharged because of their race or national origin, this agreement will ensure relief for Americans who are victimized. It will enable the Justice Department and the CFPB to work closely with Ally and others to prevent discriminatory practices in the future. And it will reinforce our determination to respond aggressively to discrimination in America’s lending markets – wherever it is found.”
The settlement resolves claims by the department 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. The average victim paid between $200 and $300 extra during the term of the loan. 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 court 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.
“Discrimination is a serious issue across every consumer credit market,” said CFPB Director Richard Cordray. “We are returning $80 million to hard-working consumers who paid more for their cars or trucks based on their race or national origin. We look forward to working closely with the Justice Department and Ally to make sure this serious issue will be addressed appropriately in the years ahead as well.”
Rather than taking applications directly from consumers, Ally makes most of its loans through over 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, like 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. The coordinated investigations by the department and the CFPB that preceded today’s settlement determined 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.
The agencies claim that Ally fails to adequately monitor its interest rate markups for discrimination or require dealers to document their markup decisions. Ally’s first effort to monitor for discrimination in interest rate markups began only earlier this year after it learned of the CFPB’s preliminary findings of discrimination, and resulted in only two dealers being sanctioned and subjected to nothing more than voluntary training.
“This settlement provides relief to those who were harmed by this discrimination,” said U.S. Attorney for the Eastern District of Michigan Barbara McQuade. “Lenders must consider an individual borrower’s credit worthiness, based on income, savings, credit history and other objective factors when determining the terms of a loan. This settlement will ensure that in the future, borrowers will be able to obtain loans from Ally based on their own credit history free from discrimination based on race or national origin.”
Today’s settlement represents the first resolution of the department’s joint effort with the CFPB to address discriminatory auto lending practices. The 2010 Dodd-Frank Act gave both the DOJ and the CFPB authority to take action against large banks like Ally for violating the ECOA. Although the department has filed previously filed lawsuits alleging violations of ECOA involving car loans, today is the first ECOA lawsuit against an auto lender that operates nationwide.
In addition to the $98 million in payments for its past conduct and requirement to refund future discriminatory charges, the settlement requires Ally to improve its monitoring and compliance systems. The settlement allows Ally to experiment with different approaches toward lessening discrimination and requires it to regularly report to the department and the CFPB on the results of its efforts as well as discuss potential ways to improve results. The department commends Ally for working cooperatively to reach an appropriate resolution of this case. The department looks forward to Ally’s commitment, as part of the settlement, to work with the Civil Rights Division and the CFPB to find improved ways to fairly charge all consumers while also fairly compensating auto dealers for the services they provide.
The department’s enforcement of fair lending laws is conducted by the Fair Lending Unit of the Housing and Civil Enforcement Section in the Civil Rights Division. Since the Fair Lending Unit was established in February 2010, it has filed or resolved 30 lending matters under the Fair Housing Act, ECOA and the Servicemembers Civil Relief Act. The settlements in these matters provide for a minimum of $775 million in monetary relief for impacted communities and more than 535,000 individual borrowers. The Attorney General’s annual reports to Congress subject to ECOA highlight the department’s accomplishments in fair lending and are available at www.justice.gov/crt/publications .
The settlement provides for an independent administrator to locate victims and distribute payments of compensation at no cost to borrowers whom the department and the CFPB identify as victims of Ally’s discrimination. The department and the CFPB will make a public announcement and post information on their websites once more details about the compensation process become available. Borrowers who are eligible for compensation from the settlement will be contacted by the administrator, and do not need to contact the department or the CFPB at this time. Individuals who have auto loan questions or would like to submit a complaint can contact the CFPB at (855) 411-2372.
The Civil Rights Division, the U.S. Attorney’s Office for the Eastern District of Michigan and the CFPB are members of the Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets and recover proceeds for victims of financial crimes. For more information on the task force, visit www.StopFraud.gov