The Consumer Financial Protection Bureau, in conjunction with the Department of Justice, recently issued an order to Ally Financial, Inc., and Ally Bank to pay $80 million in damages to auto loan consumers who were harmed by discriminatory policies on auto loan applications. Ally will also pay an $18 million penalty. It is the largest auto loan discrimination settlement in United States history.
Ally was known as GMAC Inc., prior to its government bailout in 2008. The lender has been penalized for allowing auto dealers to mark up interest rates for minority applicants and partaking of the profits. Auto dealers may legally mark up some auto loan interest rates set by the lender. The mark-up profit accrues to the lender and a portion may be used by the lender to compensate the dealer for their valuable work in establishing the customer for the bank. Such an arrangement is permissible under federal rules. However, the discretion allowed to auto dealers can create an incentive for them to unfairly set interest rates. After analyzing auto loans given by Ally between 2011 and 2013, the CFPB found 235,000 loans in which minority borrowers had been rated as more risky than similarly situated white borrowers.
Ally, like all lenders, used a system of basis points to determine the risk of a loan. Factors such as applicant income, credit history and the cost of the vehicle affect the basis points calculation. The higher the basis points assigned, the less risk is associated with the loan. Negative factors are then charged against the applicant by lowering their basis points. CFPB found that African-American borrowers were charged almost 30 basis points more in dealer mark-up, on average, than similarly qualified whites for auto loans. Hispanic borrowers were charged approximately 20 basis points more.
Such a disparity is discrimination under the Equal Credit Opportunity Act (15 U.S.C. § 1691), which makes it illegal for a creditor to discriminate in any aspect of credit transaction based on characteristics such as race, color, religion, national origin, sex, marital status, age or being a recipient of public assistance of any kind.
Ally denied any wrongdoing, but will pay a settlement administrator to contact consumers who are due to receive compensation. Interest rates will be adjusted for consumers affected and refunds will be issued for the overpayment. The settlement also requires Ally to work with the CFPB in establishing a compliance program to monitor potential discrimination in its loan portfolio. According to the CFPB, one option for Ally to maintain compliance is to completely eliminate dealer markups.