On Friday, December 20, 2013, the Consumer Financial Protection Bureau (“CFPB”) and the U.S. Department of Justice (“DOJ” and, together with the CFPB, the “Agencies”) resolved by consent order (the “Order”) their first joint fair lending action in the indirect auto lending arena (“Complaint”) against Ally Bank (“Company”), and its parent Ally Financial, Inc., alleging that the Company’s dealer compensation policy, which allowed for discretionary dealer pricing, had a disparate impact on certain borrowers in protected classes.
The $98 million in settlement payments detailed in the Order, in monetary terms, represent not only the third-largest settlement ever in a DOJ fair lending action, but also the largest in any matter involving auto lending. An analysis of the Order will prove especially helpful to our clients engaged in indirect auto lending, which have been subjected to fair lending examination scrutiny from the CFPB and prudential bank regulators for some time.
Investigation and Allegations
In connection with its ongoing examinations of indirect auto lenders’ compliance with ECOA, the CFPB initiated an investigation of the Company, focusing on roughly 2.1 million retail installment loans that the Company bought from approximately 12,000 dealers since April 1, 2011. The CFPB’s investigation allegedly revealed pricing disparities at the nationwide, portfolio level with respect to roughly 235,000 retail installment loans made to African-American, Hispanic, Asian and Pacific Islander borrowers. The CFPB referred this matter to the DOJ last month, and the DOJ asserts that it confirmed the CFPB’s findings.
Specifically, the DOJ and CFPB claim – based on statistical analysis of the Company’s loan portfolio using a combined surname and geocoding proxy method (the accuracy of which has been widely questioned) – that African-Americans paid 29 basis points more in dealer markup than similarly situated non-Hispanic white borrowers. Using the same proxy method, the Agencies also allege that the Company charged Hispanic and Asian/Pacific Islander borrowers on average approximately 20 and 22 basis points more than non-Hispanic white borrowers, respectively. The CFPB and DOJ further allege that the Company neither adequately monitored dealer interest rate markups during the period at issue nor offered fair lending training to dealers in its network.
The CFPB and DOJ based their allegations on a disparate impact theory of discrimination; they do not allege the Company intentionally discriminated against any borrowers. Specifically, the Agencies allege that the Company’s facially neutral policy of allowing dealers to markup interest rates on retail installment loans – in amounts up to 250 basis points for loans with terms 60 months or less and 200 basis points for loans with terms greater than 60 months (i.e., a policy of limits that correlated to those contemplated under prior DOJ and private party fair lending settlements concerning auto finance) – resulted in certain minority borrowers paying more for credit than non-Hispanic white borrowers.
The CFPB and DOJ also allege that there was no legitimate, non-discriminatory business justification for the Company’s dealer markup policy. The use of disparate impact theory in this case reinforces the CFPB and DOJ’s willingness to pursue fair lending actions against creditors even in cases where evidence of discriminatory intent is wholly lacking.
The terms of the settlement between the Agencies and the Company are set forth in a CFPB administrative consent order and a parallel DOJ consent order filed in the U.S. District Court for the Eastern District of Michigan. Under the terms of the Order, the Company is required to:
- Pay $98 million in monetary damages. More specifically, the Company must pay $18 million into the CFPB’s civil penalty fund and $80 million into a separate settlement fund to compensate borrowers allegedly harmed between April 2011 and December 2013. The Agencies will identify and compensate such borrowers using an unspecified methodology, which the Order only describes as being predicated on data that the Company provided the Agencies during the investigation. Payments to borrowers will be administered by a third-party settlement administrator.
- Adopt and implement a compliance plan within 60 days of the Order's effective date that meets the CFPB and DOJ's approval, pursuant to which the Company must, at a minimum:
- (i) establish a dealer compensation policy that limits the maximum spread between the buy rate and the contract rate up to no more than the spread that the Company currently permits;
- (ii) provide regular notices to dealers explaining their fair lending obligations under the ECOA;
- (iii) establish quarterly and annual dealer-level and portfolio-wide analysis of markups based on the Agencies’ statistical methodology;
- (iv) take prompt corrective action with respect to dealers identified in any dealer-level quarterly analysis, to include prohibition on a dealer's ability to mark up the buy rate or termination of the dealer relationship; and
- (v) remedy affected customers identified through monitoring efforts (by using the same methodology that the Agencies used to calculate settlement damages).
- As an alternative to the above-described compliance plan, propose for the Agencies’ approval, during the pendency of the Order, a non-discretionary dealer compensation plan. If the Agencies approve such a non-discretionary plan, the Company would be relieved of compliance obligations under the Order related to discretion in dealer pricing.
It is significant that the Order stops short of prohibiting discretionary dealer markup policies. But its structure (in allowing a streamlined compliance plan without discretionary dealer pricing) seeks to incent indirect auto lenders and auto finance companies to eliminate, or significantly curtail, such policies. The Order also emphasizes the importance of ensuring compliance systems are in place when operating a dealer pricing program, including consideration of providing fair lending training to dealers.
The Order, which follows the CFPB’s bulletin criticizing indirect auto dealer pricing issued earlier this year, demonstrates vividly the seriousness with which the CFPB and DOJ are examining indirect auto lenders’ discretionary dealer markup policies. Numerous investigations by the CFPB, DOJ, and prudential bank regulators concerning this issue are ongoing, and heightened regulatory and enforcement scrutiny will undoubtedly continue in 2014.
If you have additional questions regarding the Order or its impact on your business, please contact the authors or anyone at Goodwin Procter.