The difference in interest rates led an African-American car buyer to pay about $300 in additional interest over the life of a loan compared with a white car buyer with similar income and credit scores, the CFPB said today in announcing the settlement with Ally, which was formerly the General Motors captive lender GMAC.
"Too many consumers have had to pay more for their auto loans simply because of their race or other characteristics protected under the law," CFPB Director Richard Cordray told reporters this morning. "Too often, these consumers do not know they’re paying more or are simply unable to get recourse. Today’s action signals new attention to this serious problem."
Ally Financial and Ally Bank did not admit fault through the settlement.
“Ally does not engage in or condone violations of law or discriminatory practices, and based on the company’s analysis of its business it does not believe that there is measurable discrimination by auto dealers,” the company said in a statement. “Regardless, Ally takes the assertions by the CFPB and DOJ very seriously and has agreed to the terms in the orders.”
The move by CFPB and the Department of Justice puts lenders on notice about the practice of "dealer reserve," in which a lender agrees to finance a car purchase at a certain interest rate, but lets the dealer charge a higher interest rate and pocket the difference.
This markup, usually capped at about 2 percent, has become a major source of profit for dealers as repair work has dwindled and profit margins on new cars have shrunk.
Dealers have rallied around the practice, saying it allows them to meet or beat outside loan offers in a way that other payment methods, such as flat fees, do not. They argue the practice leads to lower interest rates for savvy customers who negotiate.
With today’s enforcement case, the CFPB made clear it sees that discretion as a potential opening for discrimination, whether intentional or not.
The National Automobile Dealers Association, in a statement, was relieved that today's move did not mandate any form of a dealer flat fee compensation system.
But it expressed again some ongoing frustration with the CFPB and its oversight role.
"Regrettably ... the CFPB continues to withhold the secret methodology it uses to determine whether unintentional discrimination has occurred. The public still does not know whether the Bureau takes into account legitimate factors that can affect finance rates -- for example, a dealer's ability, regardless of race, to lower the interest rate to meet a customer's monthly budget," NADA said in a statement. "The CFPB's failure to reveal its approach is particularly troubling given the repeated and recent requests from bi-partisan members of both houses of Congress for this essential information."
Ally in its statement noted that it purchases installment contracts originated by dealers and doesn't make loans directly to consumers. Those contracts don't include information on a consumer’s race or ethnicity, Ally added.
The agency said about 235,000 minority car buyers were affected by Ally's practices, including Asian American and Hispanic car buyers as well as African-Americans.
Under the settlement, Ally will pay $80 million in restitution to affected buyers whose loans were bought by Ally between April 2011 and December 2013. Ally will also pay $18 million in civil penalties.
As of the first quarter of 2013, Ally was the largest auto finance company in the United States, financing about 6.2 percent of loan and leases on U.S. car purchases, according to an August report by Experian Automotive.
With the settlement, the CFPB hopes to influence a broader shift, but one challenge is the highly fragmented nature of the auto lending market. The five largest lenders – Ally, Toyota Financial Services, Wells Fargo, Chase and Ford Motor Credit – combined to finance just 26 percent of loans and leases in the first quarter, according to Experian.