Ally Bank has been ordered to pay $80 million in damages to minorities borrowers who paid higher interest rates for their car loans because of their ethnicity, plus another $18 million in penalties.
harmed African-American, Hispanic, and Asian and Pacific Islander borrowers and $18 million in penalties. The Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) determined that more than 235,000 minority borrowers paid higher interest rates for their auto loans between April 2011 and December 2013 because of Ally’s discriminatory pricing system.
Today’s orders represent the federal government’s largest auto loan discrimination settlement in history.
“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."
Auto loans are the third-largest source of outstanding household debt in the United States, after mortgages and student loans. When consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third-party lender like Ally, one of the largest indirect auto lenders in the United States.
“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."
As an indirect auto lender, Ally sets a risk-based interest rate, or “buy rate,” and then allows auto dealers to charge a higher interest rate when they finalize the deal with the consumer. This is typically called “dealer markup.” Ally then shares some or all of the revenue from that increased interest rate with the dealer. Markups can generate compensation for dealers while giving them the discretion to charge consumers different rates regardless of consumer creditworthiness.
Today’s enforcement action is the result of a CFPB examination that began in September 2012. That examination evaluated Ally’s indirect auto lending program for compliance with the Equal Credit Opportunity Act (ECOA). The ECOA prohibits creditors from discriminating against loan applicants in credit transactions on the basis of characteristics such as race and national origin.
Ally is being ordered to:
- Pay $80 million in damages for consumer harm: Ally will pay $80 million to a settlement fund that will go to harmed African-American, Hispanic, and Asian and Pacific Islander borrowers whose auto loans were purchased by Ally between April 2011 and December 2013.
- Pay to hire a settlement administrator to distribute funds to victims: A settlement administrator will contact consumers if necessary, distribute the funds, and ensure that borrowers who were affected receive compensation.
- Monitor dealer markups to prevent future discrimination or eliminate dealer markups altogether: Ally will implement a compliance program to prevent future discrimination. The program will include dealer education; prompt corrective action against dealers when there are dealer disparities; and portfolio-wide analysis of pricing data for disparities. Until Ally’s compliance program effectively eliminates disparities, Ally will pay harmed consumers each year under the order.
- Pay an $18 million penalty: Ally will pay an $18 million penalty to the CFPB’s Civil Penalty Fund.