Fifth Third Bank to pay $18 million over auto loan discrimination

Auto finance specialist Fifth Third Bank has been ordered to pay $18 million to African-American and Hispanic borrowers who were subject to discriminatory auto loan pricing, following enforcement action by the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) which also requires the lender to makes changes to its pricing and compensation regime.

The enforcement action is the result of a CFPB examination that began in January 2013, which evaluated Fifth Third’s indirect auto-lending program for compliance with the Equal Credit Opportunity Act, which prohibits creditors from discriminating against loan applicants in credit transactions on the basis of characteristics such as race and national origin.

The CFPB and DOJ’s joint investigation concluded that Fifth Third’s policies resulted in minority borrowers paying higher dealer mark-ups for their auto loans than non-Hispanic white borrowers. These mark-ups were without regard to the creditworthiness of the borrowers.

As a result, the CFPB claims, thousands of minority borrowers from January 2010 through September 2015 were charged, on average, over $200 more for their auto loans.

Under the CFPB order, Fifth Third is required to substantially reduce or eliminate entirely dealer discretion. The lender has indicated it will reduce dealer discretion to mark up the interest rate to only 1.25% above the buy rate for auto loans with terms of five years or less, and 1% for auto loans with longer terms. Fifth Third also has the option under the order to move to non-discretionary dealer compensation. Over the time period under review during the CFPB investigation, Fifth Third permitted dealers to mark-up consumers’ interest rates as much as 2.5%.

Settlement

Fifth Third will pay $12 million into a settlement fund that will go to African-American and Hispanic borrowers whose auto loans were financed by the company between January 2010 and September 2015. Based on a determination by the DOJ and the CFPB, Fifth Third will receive credit of between $5 million and $6 million for remediation it has already provided to consumers who come into this category. Fifth Third will then pay any additional funds necessary into the settlement fund to bring its total payment to harmed consumers to $18 million.

A settlement administrator, also funded by Fifth Third, will contact consumers, distribute the funds, and ensure that borrowers who were harmed receive compensation. The CFPB will provide contact information for the settlement administrator once that person is chosen to address questions that consumers may have about potential payments.

Separately, the CFPB has also taken action to address what it describes as Fifth Third’s ‘deceptive marketing’ of credit card add-on products, and is demanding that the bank provide an estimated $3 million in relief to eligible harmed consumers and pay a $500,000 penalty.

“We are committed to promoting fair and equal access to credit in the auto finance marketplace,” said CFPB director Richard Cordray. “Fifth Third’s move to a new pricing and compensation system represents a significant step toward protecting consumers from discrimination. We are also obtaining millions of dollars in relief today for consumers affected by deceptive marketing of credit add-on products.”

“We commend Fifth Third for its commitment to treating all of its customers fairly without regard to race or national origin and its leadership in agreeing to impose lower caps on discretionary mark-ups,” said principal deputy assistant attorney general Vanita Gupta, head of the DOJ civil rights division. “This agreement shows that the indirect auto lending industry is moving toward a model of dealer compensation that fairly compensates dealers for their work related to loans, while limiting the dealer mark-up that leads to discriminatory pricing.”

Dealer mark up

Fifth Third Bank is the largest regional bank in Ohio and the ninth largest depository indirect auto lender in the US. In a written statement, the lender said it takes the allegations by CFPB and DOJ very seriously and has agreed to the consent orders and wants to get the issues resolved.

“The orders do not relate to auto loans Fifth Third makes directly with customers, but instead involve retail instalment contracts originated by auto dealers and then purchased by Fifth Third,” the bank said. “In reaching this settlement, Fifth Third stands firm in its conviction that we have treated and will continue to treat our customers in a fair, open and honest manner.

“Fifth Third strongly opposes any type of discrimination and has, for many years, monitored for and taken steps to avoid any potential discrimination in its auto finance business, as well as all other areas in which we interact with consumers.

“Fifth Third also limits the amount that dealers can earn through dealer mark-up, and we are further reducing that as a result of this settlement,” the bank said, adding, “When considering whether to purchase a contract from a dealer, Fifth Third does not receive or consider any information about a consumer’s race or ethnicity.”

Methodology

The action against Fifth Third is part of a larger joint effort between the CFPB and DOJ to address discrimination in the indirect auto lending market. Most recently, in July 2015, the CFPB and DOJ took an action against American Honda Finance Corporation requiring Honda to pay $24 million in consumer restitution and take the same steps to substantially reduce or eliminate entirely dealer discretion.

CFPB’s actions in bringing allegations of discriminatory lending have been sharply criticised by the National Automobile Dealers Association (NADA), among others, which claims that the methodology used to assess whether minority borrowers are being offered unfavourable terms compared to other groups is flawed.

This week the topic was considered at a hearing of the House Financial Services Committee, according to American Banker. The magazine says politicians from both parties referenced internal agency documents in which CFPB officials acknowledged sometimes overestimating the amount of bias at lenders and detailed efforts to target the dealer mark-up. They argued the agency is unfairly pursuing auto lenders and dealers, even though dealers are exempt from the CFPB’s jurisdiction, and raised questions about its disparate impact methodology, in which lenders are cited for unintentional discrimination if statistics show minorities receive higher rates at the dealership.