Washington — Nearly two years after agreeing to a landmark settlement, Ally Financial Inc.’s settlement fund is getting closer to issuing $80 million in checks to borrowers.
In December 2013, Ally agreed to pay $98 million to settle claims that the Detroit-based lender discriminated against more than 235,000 minority auto buyers, marking the federal government’s largest auto loan discrimination settlement in history.
Ally agreed to reach a settlement with the Consumer Financial Protection Bureau to pay $80 million to consumers harmed by the lending practices and $18 million in civil penalties. The CFPB said it expects checks will go out to borrowers late this year or early next year and will be issued by the independent administrator overseeing the fund.
One reason for the delay? Trying to figure out who are the minority borrowers that allegedly were discriminated against. Finding who was harmed has been challenging. The CFPB uses a system called the Bayesian Improved Surname Geocoding method to try to identify minority borrowers, but acknowledges that it is not always accurate.
The government sent borrowers claim forms this summer and borrowers have until Saturday to return them. That deadline was set by the independent administrator. The methodology that is used to try to determine who is a minority “is known to be imperfect,” said Ally spokeswoman Gina Proia on Thursday. “Data on race and ethnicity is not collected in the indirect auto finance model.”
In a 13-page complaint filed in U.S. District Court in Detroit in 2013, the Justice Department said about 100,000 African-American car buyers, 125,000 Hispanic borrowers and 10,000 Asian/Pacific Islander borrowers paid Ally higher interest rates than white borrowers “because of their race or national origin and not based on their credit worthiness or other objective criteria related to borrower risk” from 2011 through 2013 after a review of 1.2 million loans.
The average African-American victim was obliged to pay more than $300 extra over the term of the loan than a white buyer, while the average Hispanic buyer or Asian/Pacific Islander was obliged to pay more than $200 extra, the CFPB said. Even if money is left over after compensating all of the alleged victims of discrimination, the government will get to keep the balance.
Ally didn’t admit wrongdoing and argued “that a calculation of disparities needs to compare similarly situated customers and include relevant explanatory factors such as creditworthiness, differences in essential transactional details such as new/used vehicle and the selling dealer,” according to the settlement.
In July, the CFPB reached a similar settlement with Honda Motor Co.’s finance arm, American Honda Finance Corp. The company agreed to pay $24 million in restitution to minority borrowers. Honda’s discriminatory pricing and compensation structure meant “thousands of minority borrowers from January 2011 through July 14, 2015 paid, on average, from $150 to over $250 more for their auto loans.”
Dealers routinely arrange financing for customers. They are often allowed by lenders to mark up the interest rate charged to consumers, allowing them to keep the difference. The CFPB wants to make sure dealers aren’t charging minority buyers a higher rate than white buyers. In March 2013, the CFPB issued guidance urging banks to avoid discriminatory practices.
Honda agreed to reduce dealer discretion to mark-up the interest rate to only 1.25 percent above the “buy rate” for auto loans with terms of 5 years or less, and 1 percent for auto loans with longer terms.
The CFPB — created by Congress as part of the 2010 financial overhaul law known as Dodd-Frank in the wake of the 2008 financial collapse — is barred from directly regulating auto dealers, but has been investigating banks and auto lending practices for loans arranged by dealers and others.