UPDATE 2-Ally to pay $98 mln over U.S. auto lending bias charges

Fri Dec 20, 2013 12:36pm EST

By Jonathan Stempel

Dec 20 (Reuters) - Ally Financial Inc agreed to pay $98 million to settle claims by U.S. regulators that it discriminated in auto lending by charging minority borrowers higher interest rates than white borrowers.

The accord announced on Friday by the U.S. Department of Justice and the U.S. Consumer Financial Protection Bureau is the government's largest concerning auto loan discrimination.

Ally was accused of causing 235,000 Hispanic, African-American and Asian/Pacific Islander borrowers to pay about $200 to $300 more on their respective loans after dealers charged higher rates based on race or national origin, rather than creditworthiness or other objective criteria.

The civil settlement covers lending since April 2011, a period when Ally funded nearly 3 million loans through more than 12,000 dealers nationwide.

"We are taking a firm stand against discrimination in a critical lending market," Attorney General Eric Holder said in a statement.

The company was not accused of intentional discrimination, but CFPB Director Richard Cordray on a conference call said it "makes no practical difference" to affected borrowers.

Ally will pay $80 million to compensate discrimination victims, and an $18 million fine to the CFPB.

The Detroit-based company must also improve oversight and compliance practices, and refund discriminatory overcharges for three years unless it curbs rate disparities.

In a statement, Ally said race and ethnicity are not factors in its auto loan pricing, and that it "does not engage in or condone violations of law or discriminatory practices."

Ally will take a $98 million charge in the current quarter. The U.S. government owns roughly 64 percent of Ally.

WARNING TO INDUSTRY

In March, the CFPB had warned auto lenders about potential discrimination when borrowers get loans directly from dealers, sometimes known as "indirect auto lending" or dealer-assisted financing.

The practice gives dealers discretion to mark up interest rates, keeping the difference.

Consumer advocates say this gives dealers an incentive to move borrowers to costlier loans, while dealer advocates say such markups reflect the services that are provided.

Regulators said Ally failed to adequately monitor markups from the rates called for by its credit-related criteria.

The result was that minority borrowers typically paid rates that were 0.20 to 0.29 percentage point higher than what non-Hispanic white borrowers were charged, regulators said.

According to the government, upon learning of the CFPB's preliminary findings of discrimination, Ally in March 2013 stepped up its monitoring of dealers but took action against just two, subjecting them only to voluntary education.

The Justice Department settlement requires court approval.

Friday's accord is the first joint fair-lending enforcement action between the Justice Department and the CFPB, an agency established under the 2010 Dodd-Frank financial reforms.

The case is U.S. v. Ally Financial Inc et al, U.S. District Court, Eastern District of Michigan, No. 13-15180.

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