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CFPB and DOJ investigation finds violations of Equal Credit Protection Act
10/9/2015 3:10:41 PM

Charlene Crowell
By Charlene Crowell

Discriminatory auto finance and illegal credit card practices were dealt multi-million dollar blows recently. A joint investigation by the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) that began in January 2013, culminated on September 28 with settlements related to multiple alleged violations of the Equal Credit Opportunity Act. The joint actions will affect Black and Latino customers of Fifth Third Bank’s 1,300 branches in 12 states.

The first and larger enforcement calls for $18 million to be paid to customers who financed auto purchases through Fifth Third from January 2010 through September 2015. CFPB and DOJ charged that Black and Latino customers were victims of illegal and discriminatory pricing that increased interest rates without regard to their credit-worthiness. Fifth Third allowed car dealers to raise consumers’ interest rates as much as 2.5 percent above the bank’s actual rate, also known as a “buy rate”. The bank also allowed car dealers to keep some or all of the difference as compensation.

“We are committed to promoting fair and equal access to credit in the auto finance marketplace,” said CFPB Director Richard Cordray. “We are also obtaining millions of dollars in relief today for consumers affected by deceptive marketing of credit add-on products.”

“Even when African-American and Latino borrowers negotiate the interest rate, they end up paying more for their cars than white borrowers with similar credit profiles because of the car dealer interest rate markup,” said Chris Kukla, Senior Vice President and expert on auto lending with the Center for Responsible Lending (CRL).

“Discrimination has no place in the auto lending market,” continued Kukla, “and our research shows that dealer markups contribute to this discriminatory outcome. . . . The best way to root out discrimination in auto lending would be to eliminate dealer markups altogether.”

Auto lending is the third largest source of consumer debt, after mortgages and student loans, according to the New York Federal Reserve Bank. Additionally:

§ 80 percent of auto purchases are financed through car dealers; and

§ While Hispanic and African-American consumers report negotiating interest rates more white borrowers, these consumers of color still paid higher interest rates than similar white borrowers.

For the 11th time, CFPB levied fines for illegal practices in the marketing or administration of add-on credit card products and services. Approximately 24,500 customers from 2007 through 2013 will share $3 million in relief.

Lured by the promise of the option to cancel credit card payments in the event of a financial hardship such as job loss, disability or hospitalization, customers were never given accurate information on the products or costs. “Fulfillment kits” were sent to card holders accepting the telemarketing pitch or online solicitations. However the information provided contained incorrect descriptions of the product’s costs, benefits, exclusions, terms and conditions.

In addition to the $3 million credit card restitution and the $18 million for wrongful auto financing, Fifth Third will also pay two, $500,000 fines for violations in each lending area. The bank will also:

§ Pay to hire a settlement administrator to distribute funds to victims. Once the administrator has been hired, CFPB will provide him/her with contact information for affected borrowers. The administrator will then directly contact affected borrowers.

§ Substantially reduce or eliminate entirely dealer markups – The discretionary interest rate markups will be limited to 1.25 percent above the buy rate for vehicle loans of 5 years or less. Loans with longer terms will now be limited to 1.0 percent markup.

Fifth Third Bank, the ninth largest depository indirect auto lender in the nation, now joins Ally Bank, American Honda Financial and Evergreen Bank as violators of the Equal Credit Protection Act. Together, the sum of fines and restitution in this one lending area now totals $194 million.

“Consumers deserve a level playing field when they enter the marketplace, especially when financing an automobile,” said U.S. Attorney Carter M. Stewart of the Southern District of Ohio. “This settlement prevents discrimination in setting the price for auto loans.”

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