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From Banking and Finance Law Daily, December 20, 2013

Ally agrees to pay nearly $100 million to settle indirect auto loan discrimination charges

By Richard A. Roth, J.D.

Ally Financial Inc. and Ally Bank (Ally) have together agreed to pay $98 million to settle charges that they did not try hard enough to ensure that their auto loan pricing structure did not allow illegal discrimination on the basis of race or national origin. According to the Consumer Financial Protection Bureau, the result was that more than 235,000 African-American, Hispanic, and Asian and Pacific Island borrowers paid excessive interest rates on loans purchased by Ally between April 2011 and December 2013. The payment includes $80 million in damages to consumers who were harmed and an $18 million payment to the CFPB’s Civil Penalty Fund.

The CFPB and Justice Department both participated in the settlement. The CFPB issued a consent administrative order, while the Justice Department agreement was filed in the U.S. District Court for the Eastern District of Michigan. In the settlement, Ally did not admit any wrongdoing.

Ally Financial originally was known as General Motors Acceptance Corporation and was created by GM to finance automobile purchases. It received a substantial investment from the federal government under the Troubled Asset Relief Program, and the Treasury Department remains the holding company’s majority shareholder.

Indirect auto lending. Discrimination did not occur in loans made by Ally directly; rather, it happened in loans that Ally bought from automobile dealers, the bureau says.

According to CFPB Director Richard Cordray, Ally is one of the largest indirect auto lenders in the country. As an indirect lender, it buys loans that have been originated by automobile dealers. Ally sets a minimum interest rate for a loan it will buy and allows dealers to charge auto buyers a higher rate if they can do so. This “dealer markup” then is divided between the dealer and Ally, the CFPB says.

As a result of the process, a dealer has the opportunity and the incentive to negotiate for interest rates that are not based solely on the buyer’s creditworthiness, the bureau says. Ally had no effective compliance program to monitor the loans it bought for illegal discrimination.

Settlement terms. In addition to the payments, Ally has agreed to create a compliance program that is intended to prevent discrimination in the future. The program will include not only purchase monitoring but also dealer education and corrective action against dealers where discrimination may be present. The settlement agreement allows Ally, as an alternative, to eliminate discretionary dealer mark-ups.

The agreement also calls for the use of an independent administrator.

CFPB guidance. The bureau issued a bulletin in March 2013 in which it warned indirect lenders that they were liable for discrimination in their loan portfolios (CFPB Bulletin 2013-02). The bulletin, which applies to bank and nonbank lenders, says that indirect auto lending poses a significant risk that violations of the equal credit laws will occur. While an indirect lender is not liable for an automobile dealer’s discriminatory actions, “an indirect auto lender that permits dealer markup and compensates dealers on that basis may be liable for these policies and practices if they result in disparities on a prohibited basis,” the bulletin says.

Companies: Ally Bank; Ally Financial Inc.; General Motors Acceptance Corporation

MainStory: TopStory ConsumerCredit CFPB EqualCreditOpportunity Loans

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