Ally in $98 Million Settlement on Bias in Auto Loans

Ally Financial agreed on Friday to pay $98 million to settle accusations that it discriminated against minority borrowers who were charged more than white customers for auto loans by car dealers.

Under the settlement, which was announced on Friday by the Justice Department and the Consumer Financial Protection Bureau, Ally will pay $80 million to compensate victims and $18 million to the C.F.P.B.’s civil penalty fund.

The C.F.P.B. found that Ally “had not made sufficient efforts to ensure that it was complying with fair lending laws in its pricing of indirect auto loans,” Richard Cordray, the director of the C.F.P.B., said in a statement announcing the administrative action. Working with the Justice Department, the C.F.P.B. found that 235,000 minority borrowers were paying up to $300 on average more in interest than white borrowers with similar credit profiles.

Those payments came in the form of “dealer markups,” or the percent that car dealerships can charge to arrange loans through banks like Ally. Dealerships can typically charge up to 2.5 percent in fees that they are not required to disclose. The consumer bureau has contended that such discretionary pricing policies have led dealerships to charge nonwhite borrowers more, a violation of the Equal Credit Opportunities Act.

Ally, one of the nation’s largest auto lenders, had previously disclosed that it was facing scrutiny from the consumer protection bureau on concerns that the bank had not done enough to protect borrowers, even indirectly. While the bank agreed to the settlement, it did not agree with the findings.

“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,” the bank said in a statement. “Regardless, Ally takes the assertions by the C.F.P.B. and D.O.J. very seriously and has agreed to the terms in the orders.” Those terms also include establishing a compliance committee to prevent future discrimination.

Regulators have increased their scrutiny of auto lending as the industry has surged to $97.4 billion, the highest level since the third quarter of 2007, according to a report from the Federal Reserve Bank of New York. At the same time, consumer advocates worry about borrowers who may not know they have been victims of discrimination.

Ally caps the amount of dealer markup at 2 percent to 2.5 percent, depending on the loan’s terms. Still, some advocates say the cap doesn’t go far enough.

“We think that this settlement shows that dealer markup, compared with other compensation systems, is just one that is so fraught with fair lending risk that regulators, and frankly the industry, need to abandon it for something else,” said Chris Kukla, senior vice president at the Center for Responsible Lending, a consumer advocacy group.

The majority of people in the United States need a loan to buy a car, and about 80 percent of them use financing arranged by the dealership. Those dealers, in turn, work with partner banks like Ally. People in the auto industry argue that dealers deserve to be compensated for this one-stop-shop service. Regulators and consumer groups have proposed alternate compensation models, including a flat-fee system, which the auto industry argues would cost consumers money in the long run by eliminating competitive pricing among dealerships.

As part of the settlement, Ally will have to appoint a third-party administrator to identify victims of discriminatory lending practices. Although the average victim paid a few hundred dollars too much, it is unclear whether the C.F.P.B. expects the settlement money to pay individuals a comparable sum. The C.F.P.B. began its examination of Ally’s indirect lending portfolio in September of last year and looked at data from April 2011 to March 2012.

Identifying victims has also been a challenge for regulators and consumer advocates. Loan data, including markups and interest rates offered by banks, is not publicly available. Instead, advocacy groups have had to rely on small bits of information - like part of a borrower’s name - to paint a larger picture of the broader lending landscape.

That lack of specificity has drawn criticism from the auto industry and some lawmakers, who say that hard data is necessary to prove wrongdoing.

The National Automobile Dealers Association released a statement on Friday calling for the consumer bureau to make its findings more transparent.

“N.A.D.A. fully supports our nation’s fair-lending laws and the commitment of federal agencies to eliminate discrimination in the marketplace,” the association said in the statement. “We are encouraged that today’s announcement does not mandate any form of a dealer flat-fee compensation system.”