U.S. Markets closed

Consumer Watchdog Announces Largest Discriminatory Auto Lending Case Ever

Christine DiGangi

The Consumer Financial Protection Bureau announced Friday the largest auto loan discrimination case to date, in which Ally Financial Inc. and Ally Bank has been ordered to pay $80 million in damages to 235,000 minority borrowers impacted by their discriminatory pricing system.

The enforcement action stems from an investigation started in 2012, through which the CFPB and the Department of Justice determined Ally’s auto loan interest rates were higher for African-American, Hispanic, and Asian and Pacific Islander borrowers than for non-Hispanic white borrowers of similar creditworthiness.

Ally is one of the nation’s largest indirect auto lenders, and this settlement takes issue with its dealer markup practices: Ally sets a risk-based interest rate for borrowers and then allows the dealers to charge a higher interest rate when closing the sale with the buyer. Between April 2011 and December 2013, Ally overcharged thousands of consumers for auto loans based on race and national origin, which is prohibited by the Equal Credit Opportunity Act.

“Too many consumers have had to pay more for their auto loans simply because of their race or other characteristics protected under the law,” said CFPB Director Richard Cordray in a press call announcing the action. “Too often, these consumers do not know they are paying more or are simply unable to get recourse. Today’s action signals new attention to this serious problem.”

As is the case with most credit, auto loan interest rates are tied to a consumers’ credit scores, which indicate an individual’s likelihood of repaying debt, based on his or her credit history. A person’s credit report will show how many accounts he or she has in good standing, how often debt payments are made on time, how frequently that person applies for new credit and how much a person uses of his or her available credit. All these things carry different weight in credit scoring models (there are dozens of them), which creditors then use to help make lending decisions.

When shopping for new credit, whether it’s a car loan, credit card, mortgage or personal loan, it’s helpful to start with an idea of how you look to a lender and participate in the loan-application process as an informed consumer.

By looking at your credit scores, which you can do using free tools like the Credit Report Card, you can engage in a productive discussion with lenders about your credit history and how it impacts how much you pay for financial products. For instance, if you receive a high interest rate on an auto loan, it may be because of a poor payment history — or maybe you have a solid credit history, and you’ll need to ask your lender for an explanation. You should also pull free copies of your credit reports using AnnualCreditReport.com.

The bureau and DOJ also ordered Ally to pay $18 million to the CFPB’s civil penalty fund, which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to be used for payments to victims and consumer education and financial literacy programs.

“With this largest-ever settlement in an auto loan discrimination case, we are taking a firm stand against discrimination in a critical lending market,” said Attorney General Eric Holder, in a news release announcing the action. “It will enable the Justice Department and the CFPB to work closely with Ally and others to prevent discriminatory practices in the future. And it will reinforce our determination to respond aggressively to discrimination in America’s lending markets – wherever it is found.”

More from Credit.com