Dealers: U.S., Fifth Third settlement over lending bias to curb consumer savings

National dealer associations are criticizing the government’s settlement with Fifth Third Bancorp over alleged discriminatory auto lending practices, claiming dealers who work with the bank will now be limited in offering consumers competitive interest rates on auto loans.

As part of the settlement, Fifth Third agreed to limit dealer reserve to 1.25 percent above its wholesale buy rate on an auto loan. Previously it had allowed dealerships up to 2.5 percent in reserve.

Dealer reserve is the share of a customer’s interest rate that dealerships earn for negotiating a loan.

Dealers have long maintained that the reserve allows them the flexibility to offer rate discounts on auto loans.

As a result of the settlement, “consumers will lose as much as 1.25 percent of available savings on their loans,” the National Automobile Dealers Association, National Association of Minority Automobile Dealers and the American International Automobile Dealers Association said in a joint statement on Tuesday.

“The government has significantly reduced the amount of money consumers can save on auto financing at the dealership,” NADA Chairman Bill Fox said in the statement. “Consumers have every right to continue benefiting from a system that saves them money every day, but bank-by-bank, percent-by-percent, the CFPB is taking those rights away, and without giving consumers any say in the matter.”

The CFPB announced the settlement with Fifth Third on Monday. An investigation by the CFPB and the U.S. Department of Justice evaluated Fifth Third’s indirect auto-lending program for compliance under the Equal Credit Opportunity Act.

The agencies attempted to prove auto lending discrimination using a legal theory known as disparate impact, which says that a practice can be considered discriminatory if it has a disproportionately adverse effect on minorities, even if no discrimination was intended.

The agencies determined that African American and Hispanic borrowers paid higher interest rates on Fifth Third auto loans than other similarly situated borrowers. From January 2010 through September 2015, thousands of minority borrowers were charged on average $200 more for their auto loans than non-Hispanic white borrowers, the CFPB said.

Fifth Third agreed to pay $18 million into a settlement fund for potentially affected consumers and to limit dealer reserve. The bank agreed to cap dealer reserve at 1.25 percent above its wholesale buy rate for loans of 60 months or fewer and at 1 percent for loans with terms longer than 60 months.

In a statement Monday, Fifth Third said, “When considering whether to purchase a contract from a dealer, Fifth Third does not receive or consider any information about a consumer’s race or ethnicity.” The bank added that it “stands firm in its conviction that we have treated and will continue to treat our customers in a fair, open and honest manner.”

Fifth Third is the second auto lender to limit dealer reserve as the result of CFPB enforcement. In July, American Honda Finance Corp. agreed to cap dealer reserve at 1.25 percent for loans lasting 60 months or fewer and at 1 percent for loans longer than 60 months. As part of the settlement, Honda agreed to pay $24 million to potentially affected consumers.

In December 2013, Ally Financial settled with the CFPB without agreeing to limit dealer reserve. Ally paid $98 million -- $80 million in consumer compensation and $18 million in penalties -- under a consent agreement with the CFPB and Justice Department. The settlement administrator began contacting potentially affected customers to distribute their funds in July.

In the dealer groups’ statement on Tuesday, NAMAD President Damon Lester pointed to the Fair Credit Compliance Program developed by the three groups as a “viable solution to both protect consumers and provide fairness to dealers.”

The Fair Credit Compliance Program recommends dealerships adopt a set method for determining the amount of compensation they earn for arranging customer financing. For example, dealers could charge each customer a fixed number of basis points over the lender’s buy rate on the credit contract, or a fixed percentage of the amount financed, or a fixed dollar amount. In cases where the dealership reduces the pre-set amount of compensation, it must document the reason, such as a lower rate to meet a competitor’s offer. NADA recommends dealerships identify in advance each condition for which it might reduce its pre-set amount of compensation.

“While we appreciate the CFPB’s commitment to rooting out discrimination, our approach, originally recommended by the DOJ, will be much more effective than the arbitrary nature in which the CFPB is currently proceeding,” Lester said in the statement.

AIADA Chairman Bradley Hoffman also backed the Fair Credit Compliance Program as the best approach, calling it “the best way to address fair credit risk while also preserving the dealer discounts that save consumers money.”

“Right now, the only reason we can’t have both is because of the CFPB, and I think consumers deserve better than what they’re currently getting out of Washington, D.C.”

You can reach Hannah Lutz at hlutz@crain.com

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