Fifth Third Bank last week joined a list of auto lenders under investigation by the U.S. Department of Justice for auto lending practices.
The probe will determine “whether the Bank engaged in any discriminatory practices in connection with the Bank’s indirect automobile loan portfolio,” Fifth Third said in a quarterly report filed with the Securities and Exchange Commission. The Cincinnati-based bank said it is cooperating with the investigation.
Toyota Motor Credit Corp. and American Honda Finance Corp. made similar disclosures last year, citing both the Justice Department and Consumer Financial Protection Bureau.
So did Ally Financial Inc., which in December announced a consent agreement with the Department of Justice and CFPB. Ally denied that it tolerated discrimination but paid $80 million in consumer restitution to minority borrowers that the CFPB said were overcharged. Ally also paid $18 million in penalties.
The CFPB is trying to get lenders to adopt flat fees or some other form of dealership compensation in which dealerships don’t have any discretion over the amount. Lenders’ usual dealership compensation method, dealer reserve, typically allows dealerships to add up to 2 or 3 percentage points to the lender’s rate on a loan. The CFPB says dealer discretion creates the opportunity for dealerships to charge minorities and other legally protected classes more.
The National Automobile Dealers Association counters that competition among dealerships keeps consumer rates low. Taking away dealer discretion might stop dealerships from charging more, but it also takes away the dealership’s opportunity to offer a discount to close a deal, NADA says.
Fifth Third had an average of $12 billion in auto loans outstanding in the first quarter, up about 1 percent from the year-earlier period. According to Experian Automotive, Fifth Third was the No. 12 U.S. auto lender ranked by market share for new and used vehicles combined for the fourth quarter of 2013, the latest quarter available.