With Ally Financial having to refund money to victims of alleged bias in auto loans, are the dealerships that originated those loans now exposed to liability?
Maybe, according to some consumer advocates.
After all, under the “disparate impact” theory pursued by the Consumer Financial Protection Bureau, the central issue is dealer discretion in setting the dealer reserve -- the share of the customer’s interest rate that dealerships earn for negotiating the finance contract. By that theory, it’s the dealership that’s discriminating, whether accidentally or on purpose; the lender is liable only for the pricing policies that allow it to happen.
Under the settlement announced by the CFPB today, Ally Financial agreed to pay $80 million in consumer restitution and another $18 million in civil penalties for alleged discrimination against minority buyers. Lender policies resulted in a disparate impact against legally protected classes of borrowers, the CFPB said.
Some consumers who get a refund may want to sue the dealership that allegedly discriminated against them, said attorney Dan Blinn of the Consumer Law Group in Rocky Hill, Conn. He has represented consumers in past lawsuits against dealerships.
“It actually is the dealership conduct that results in the disparate impact. But it is the lender policy that leads to that discrimination,” Blinn said in a phone interview. “Some consumers may want to sue a dealership, if they understand that it was the dealership’s policies that led to the discrimination.”
John Van Alst, an attorney for the Boston-based National Consumer Law Center, agreed that some consumers may react that way, but he said mandatory binding arbitration clauses in most finance contracts would make it difficult for an individual to sue.
State authorities and the U.S. Department of Justice theoretically could file enforcement actions against dealerships for alleged discrimination, he said.
Blinn said even if dealers are theoretically at fault, lenders have enough power in their hands to reduce the risk of bias.
“The finance companies do have responsibilities here,” Blinn said. “The only way to address it and make sure all consumers are treated fairly without regard to their race or ethnicity is to make sure the finance companies have procedures in place to prevent it from happening.”
Blinn said it’s probably news to most consumers that dealers participate in setting the consumer’s interest rate and participate in the profit.
“The typical consumer has no idea dealerships can mark up the interest rates. They don’t know there’s a difference between the buy rate and the contract rate,” he said. “And many times the consumer is misled that the dealership is working with them to get the best possible rate.”
Any action against dealers would have to come from somewhere other than the CFPB. The agency doesn’t have jurisdiction over dealerships, except for buy-here, pay-here stores.
The Department of Justice has jurisdiction over dealerships, but the Ally Financial consent order doesn’t apply to dealerships, said Eric Halperin, special counsel for fair lending, Civil Rights Division.
“The DOJ has jurisdiction over all creditors, which would include auto dealers,” he said in a question-and-answer session following the conference call to announce the Ally Financial settlement. “But not in this action.”
Said Ally in a statement: “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. Regardless, Ally takes the assertions by the CFPB and DOJ very seriously and has agreed to the terms in the orders.”