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Ally to Pay $98 Million to Settle Charges of Biased Auto Lending

Ally Financial agreed recently to pay a total of $98 million to settle accusations of discriminatory auto lending.

The consent order was announced recently by the Consumer Financial Protection Bureau (CFPB) and the Justice Department (DOJ).

The settlement requires Ally to pay $18 million to the CFPB civil penalty fund and $80 million to minority borrowers who are victims of the auto lending discrimination by the financial institution’s partner car dealers.

ally bank

CFPB director Richard Cordray said that the bureau found that Ally’s efforts in ensuring its compliance with fair lending laws in its indirect auto loans were insufficient. Further, the bureau, in joint effort with the DOJ, found that there are about 235,000 borrowers who were paying an average of $300 more interest than white borrowers with same credit quality.

The extra payments largely came from dealer markups or the percent dealerships add to the loan interest rate as compensation for arranging bank auto loans for buyers. Typically, dealers discretionarily add up to 2.5 percentage points to the base interest rate.

The CFPB contends that such practice leads dealers to charge minority borrowers more, which violates the Equal Credit Opportunities Act.

But Ally, one of the biggest auto lenders in the U.S., did not agree with the consumer protection’s findings even if they agreed to the settlement.

The bank said in a statement, “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.”

Aside from paying a sum of $98 million, the settlement requires the bank to “improve its monitoring and compliance systems” by working with the Civil Rights Division and the CFPB while “fairly compensating auto dealers.”

It also requires an independent administrator that can “locate victims and distribute payments of compensation at no cost to borrowers whom the department and the CFPB identify as victims of Ally’s discrimination.”

Ally limits the dealership markup at 2.5 percent, but some advocates are not convinced.

The senior vice president of a consumer advocacy group Center for Responsible Lending, Chris Kukla, said that the dealer markup “is so fraught with fair lending risk that regulators, and frankly the industry, need to abandon it for something else.”

Meanwhile, the National Automobile Dealers Association said in a statement, “NADA fully supports our nation’s fair-lending laws and the commitment of federal agencies to eliminate discrimination in the marketplace.”

It demanded more transparency in CFPB’s findings in discriminatory lending among auto dealers.

Regulators has become stricter in scrutinizing the auto lending industry since it reached the highest level of more than $97 billion in six years.

The consumer bureau started examining Ally Financial’s indirect loan portfolio in September 2013 and analyzed data from April 2011 to March 2012.

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