The Consumer Financial Protection Bureau and the Department of Justice last week announced a $98 million settlement with Ally Financial and its subsidiary, Ally Bank, over racial discrimination in auto lending. CFPB director Richard Cordray said the settlement was the government’s first addressing bias in car loans, implying that there may be more on the way.
The fact that the Feds had to crack down on Ally indicates just how difficult it can be to root out discrimination in the lending world. Not only had the company engaged in the very same sort of behavior a little more than a decade ago, it did so most recently despite the fact that Ally’s majority owner was the United States government. The ownership stake was the result of the auto bailout of 2008 and 2009.
You see, until a few years ago, Ally Financial used to be known as General Motors Acceptance Corp., and in 2004, GMAC settled a class action lawsuit over discriminatory lending practices – practices that looked pretty much exactly like the ones CFPB and Justice cited in their announcement on Friday.
The company changed its name to Ally Financial in 2010, after the U.S. Treasury pumped $16.3 billion into the company to save it from bankruptcy. At one point, the government owned nearly 75 percent of the company. Its stake today is approximately 64 percent.
Ally Bank, a subsidiary of Ally Financial, is what’s known as an “indirect” lender in the auto loan business. Essentially, car dealers make loans to buyers, and Ally immediately purchases the loan from the dealer. When a customer wants to finance a car purchase, the dealership submits the customer’s financial information to Ally, which replies with an offer that includes the minimum interest rate at which it will purchase the loan from the dealer.
Note the word “minimum.” The dealer does not have to offer the loan at the minimum rate. In fact, the buyer will likely never know what the minimum rate is. If the dealer can convince the buyer to sign off on a loan at a rate above the minimum, Ally and the dealer share in the excess revenue.
So, auto dealers have an incentive to try to lend at a rate above the minimum, and they do – particularly when it comes to minority borrowers.
In 2004, GMAC agreed to settle a class action suit for $11.2 million. The plaintiffs had complained that GMAC loans made to African American and other minority buyers typically added hundreds of dollars more to the price of a car than loans made to similarly creditworthy white borrowers.
The settlement was one of nearly a dozen reached with various indirect lenders through litigation driven by the National Consumer Law Center. The settlements placed caps on the mark-ups that dealers could charge. However, the agreements all had sunset provisions, which expired between 2007 and 2012.
The description of dealer behavior in a consent order released last week provided a near perfect echo of the complaints in the case settled in 2004. It found that Black, Hispanic and Asian/Pacific Islander borrowers all paid significantly more than white borrowers. For all three types of borrowers, government investigators found, the differences were “based on race and/or national origin and not based on creditworthiness or other objective criteria related to borrower risk.”
CFPB and DOJ looked specifically at loans made between April 1, 2011 and March 31, 2012. During that time period, it determined, about 235,000 minority borrowers were sold loans at higher mark-ups than those paid by the average non-Hispanic white borrower.
To be clear, the actual discriminatory activity appears to have originated at the car dealer level. When financial information on specific borrowers is sent to Ally, information on the borrower’s race and ethnicity is not included.
However, the settlement agreement notes that the higher mark-ups charged to minorities “are a result of Ally’s specific policy and practice of allowing dealers to mark up a consumer’s interest rate above Ally’s established buy rate and then compensating dealers from that increased interest revenue.”
In his statement, Cordray said, “Whether or not Ally consciously intended to discriminate makes no practical difference. In fact, we do not allege that Ally did so. Yet the outcome, and the harm to consumers, is the very same here.”
Stuart Rossman, director of litigation for the NCLC said that now that the caps instituted by the class action settlements have expired, he assumes discrimination has resumed industry-wide.
“It was universal when we were looking at it, and I have no reason to believe it’s different now,” he said.
Ally denies any wrongdoing on its part or on the part of its dealers. In an emailed statement, a company spokesperson wrote:
“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, which include enhancing dealer monitoring, reducing the perceived disparity for the protected classes outlined in the order, paying a civil money penalty of $18 million and contributing $80 million toward a settlement fund to be managed by an independent settlement administrator. Ally expects to take a $98 million charge in the fourth quarter related to these matters.”
The deal with the government is not Ally’s only run-in with the DOJ in recent years. In February 2012, it was one of a number of lenders that reached a $25 billion settlement with the government over mortgage servicing and foreclosure abuses.
Follow Rob Garver on Twitter: @rrgarver
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