Ally Financial Inc. has reached an agreement to pay $98 million to resolve claims that its method of paying dealers for arranging contracts led minority car buyers into car loans with higher interest rates. The settlement is seen as a clear indication of the United States Consumer Financial Protection Bureau's resolve to police the auto lending market.
The difference in interest rates made an African-American car buyer pay around $300 more interest over the life of a loan compared with a white car buyer with similar income and credit scores, the CFPB disclosed. "Too many consumers have had to pay more for their auto loans simply because of their race or other characteristics protected under the law," CFPB Director Richard Cordray said.
He remarked that oftentimes, minority consumers do not know they are paying more or are just unable to get recourse. He noted that the action by CFPB signals “new attention to this serious problem." Ally Financial and Ally Bank, however, did not admit any fault in the settlement.
In a statement, the company said that it “does not engage in or condone violations of law or discriminatory practices,” adding that it does not believe that there is measurable discrimination by auto dealers.
The action by CFPB and the Department of Justice placers lenders on notice about the practice of "dealer reserve," wherein a lender agrees to finance a vehicle purchase at a particular interest rate, but allows the dealer charge a higher interest rate and pocket the difference. The markup, which is capped at about 2%, has become a major source of profit for dealers.