This morning, the CFPB and the DOJ announced their first ever joint fair lending enforcement action to resolve allegations that an auto finance company’s dealer compensation policy, which allowed for auto dealer discretion in pricing, resulted in a disparate impact on certain minority borrowers. The $98 million settlement is the DOJ’s third largest fair lending action ever and the largest ever auto finance action.
Investigation and Claims
As part of the CFPB’s ongoing targeted examinations of auto finance companies’ ECOA compliance, the CFPB conducted an examination of this auto finance company in the fall of 2012. This finance company is one of the largest indirect automobile finance companies in the country which, according to the CFPB and DOJ’s estimates, purchased over 2.1 million non-subvented retail installment contracts from approximately 12,000 dealers between April 1, 2011 and present. The CFPB’s investigation of the finance company allegedly revealed pricing disparities in the finance company’s portfolio with regard to auto loans made by dealers to African-American, Hispanic, and Asian and Pacific Islander borrowers. The CFPB referred the matter to the DOJ just last month, and the DOJ’s own investigation resulted in findings that mirrored the CFPB’s.
Specifically, the federal authorities claim that, based on statistical analysis of the loan portfolios, using controversial proxy methodologies, the investigations showed that African-American borrowers were charged on average approximately 29 basis points more in dealer markup than similarly situated non-Hispanic whites for non-subvented retail installment contracts, while Hispanic borrowers and Asian/Pacific Islander borrowers were charged on average approximately 20 and 22 basis points more, respectively. The complaint also faults the finance company for not appropriately monitoring pricing disparities or providing fair lending training to dealers.
The CFPB and the DOJ did not claim that the finance company intentionally discriminated against any borrowers. Instead the federal agencies alleged that the finance company’s facially neutral pricing policy allowed auto dealers to price in such a manner that resulted in certain minority groups, on average, paying more for credit than non-Hispanic white borrowers. The federal authorities employed disparate impact theory of discrimination, which allows government and private plaintiffs to establish “discrimination” based solely on the results of a neutral policy without having to show any intent to discriminate (or even in the demonstrated absence of intent to discriminate). When announcing the settlement, CFPB Director Cordray stated that “[w]hether or not [the finance company] consciously intended to discriminate makes no practical difference. In fact, we do not allege that [the finance company] did so. Yet the outcome, and the harm to consumers, is the very same here.”
The investigation and potential enforcement action were disclosed by the finance company earlier this year. The final terms, formalized in a CFPB administrative consent order and a DOJ consent order filed in the U.S. District Court for the Eastern District of Michigan, require the finance company to pay an $18 million penalty and provide $80 million for a settlement fund to compensate borrowers allegedly harmed between April 2011 and December 2013. The CFPB and the DOJ will identify borrowers to be compensated and the amount to be paid to each identified borrower using an undisclosed methodology, and the payments will be administered by a third party administrator paid for by the finance company.
In addition, the finance company is required to adopt and implement a compliance plan pursuant to which the finance company must: (i) establish a dealer compensation policy that limits the maximum spread between the buy rate and the contract rate to no more than the spread currently permitted; (ii) provide regular notices to dealers explaining ECOA and dealer pricing obligations; (iii) establish quarterly and annual portfolio-wide analysis of markups based on the CFPB and the DOJ statistical methodologies; (iv) take prompt corrective action with respect to dealers identified in such quarterly analysis that culminates in prohibiting a dealer’s ability to mark up the rate or termination of the dealer relationship; and, (v) providing remuneration for affected customers.
While the settlements do not bar discretionary dealer compensation, they provide an incentive for the finance company to eliminate the practice. The agreements permit the finance company to develop a non-discretionary compensation plan for approval by the CFPB and the DOJ, subsequent to which the finance company no longer is required to implement the majority of the compliance plan.
Dealer compensation practices have been targeted by the CFPB for the past year, including in guidance issued earlier this year, which the CFPB recently defended at a public forum. We expect the CFPB’s scrutiny of dealer compensation and auto finance companies more generally to continue into next year.