Back in 2013, Ally Bank agreed to pay $80 million in damages to minority borrowers who allegedly paid higher interest rates for their car loans because of their ethnicity, plus another $18 million in penalties.
Now, the government is ready to start sending out checks, but there's one hitch: it's not quite sure who's a minority group member and who isn't. After all, that's not information that is typically included on a car loan application. In fact, it's illegal under federal law to collect such information.
So, the Consumer Financial Protection Bureau has had to be a little creative. It's using a compjuter algorithm to make educated guesses about car buyers' ethnicity, based on their last name and their address.
The CFPB has been sending a couple of different letters. One letter tells recipients they are probably eligible for a monetary award and asks them to write back if they are not a minority group member; that letter goes to consumers the algorithm is 95% sure are minorities. Another letter, sent to those whose status is less clear, asks recipients to sign and return the letter to certify that they are minorities.
While the process may sound a little unusual, the CFPB says it's confident it will be mostly accurate, the Wall Street Journal reported. “We anticipate that the full amount of the settlement fund will be allocated to affected customers,” CFPB spokesman Sam Gilford said.
"A serious issue"
At the time of the settlement, the CFPB said it had 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 allegedly discriminatory pricing system.
“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.
The CFPB has been trying to tighten its regulation of third-party lenders to reduce alleged discrimination against minority buyers. Third-party lenders often give dealers leeway to mark up the interest rate, giving dealers a financial incentive to take advantage of low-income buyers and minority group members.
Dealers and their trade groups vehemently deny this and say the flexibility third-partly lenders provide helps them find financing for buyers who would not otherwise qualify for a loan.