Ally Financial and Ally Bank agreed today to pay $98 million to the Department of Justice and the Consumer Financial Protection Bureau for engaging in auto-lending discrimination practices. The settlement represents the largest ever in an auto loan discrimination case.

The settlement also represents the first joint fair-lending enforcement action between the Justice Department and CFPB to address discriminatory auto-lending practices. The Dodd-Frank Act gave both agencies authority to take action against large banks that violate the Equal Credit Opportunity Act (ECOA), which prohibits discrimination in all forms of lending, including auto lending.  Although the Justice Department has previously filed lawsuits over ECOA violations involving car loans, the Ally settlement is the first ECOA lawsuit against a nationwide auto lender.

According the complaint, Ally engaged in an ongoing nationwide practice of discrimination by charging approximately 235,000 African-American, Hispanic, and Asian/Pacific Islander borrowers higher interest rates than non-Hispanic white borrowers since April 1, 2011. Ally charged borrowers higher interest rates because of their race or national origin, not because of the borrowers' creditworthiness or other objective criteria related to borrower risk, the Justice Department and CFPB claimed. The average victim paid between $200 and $300 extra during the term of the loan.

The Justice Department and CFPB further claimed that Ally failed to adequately monitor its interest rate markups for discrimination or require dealers to document their markup decisions.  Ally's first effort to monitor for discrimination in interest rate markups began only earlier this year after it learned of the CFPB's preliminary findings of discrimination, and resulted in only two dealers being sanctioned and subjected to nothing more than voluntary training. 

The Justice Department filed the settlement, which is subject to court approval, in the U.S. District Court for the Eastern District of Michigan in conjunction with its complaint.  Ally resolved the CFPB's claims by entering into a public administrative settlement.

Settlement Details

The settlement provides $80 million in compensation for victims of past discrimination, and requires Ally to pay $18 million to the CFPB's Civil Penalty Fund.  “Ally also must refund discriminatory overcharges to borrowers for the next three years, unless it significantly reduces disparities in unjustified interest rate markups,” the Justice Department stated.

As part of the settlement, Ally must also improve its monitoring and compliance systems.  The settlement allows Ally to experiment with different approaches toward lessening discrimination and requires it to regularly report to the Justice Department and CFPB on the results of its efforts, as well as discuss potential ways to improve results.