WASHINGTON -- The federal government is sending a clear message to auto lenders: It's time for them to rethink the way they pay dealers for arranging loans.
The 3-year-old Consumer Financial Protection Bureau and the U.S. Department of Justice last week announced a $98 million settlement with Ally Financial Inc. to resolve claims that Ally's method of compensating dealers had resulted in loans with higher interest rates for minority buyers.
The crackdown on Ally, which finances vehicle purchases at more than 12,000 U.S. dealerships, underscores the fact that regulators are ready and willing to act on concerns about the dealer reserve -- the payment lenders make to dealers for arranging a loan -- despite fierce pushback this year.
"What the CFPB is trying to do is shift the business model," said Michael Benoit, a Washington partner at law firm Hudson Cook LLP, who predicts more such enforcement actions. "And this is the way they're choosing to do it."
Under the settlement, Ally will repay $80 million to affected car buyers and pay an $18 million civil penalty. That amount pales in comparison with the multibillion-dollar settlements the U.S. government reached with banks in the aftermath of the housing crisis, but it's the largest auto loan discrimination settlement in U.S. history.
Fair-lending advocates have long taken aim at the practice of the dealer reserve, in which a lender agrees to finance a car purchase at a certain interest rate but lets the dealer charge a higher rate and pocket the difference. The CFPB says this discretion has led to bias against minorities.
Differences in dealer reserve meant African-American car buyers with loans financed by Ally paid an average of $300 in extra interest over the life of a loan, compared with white car buyers with similar credit profiles, according to a government analysis.
"Too often, these consumers do not know they're paying more or are simply unable to get recourse," CFPB Director Richard Cordray told reporters after announcing the settlement. "Today's action signals new attention to this serious problem."