CFPB reaches an $80 million settlement with Ally over rate discrimination

By Bill Vogeney

How about this headline:

CFPB reaches an $80 million settlement with Ally over rate discrimination

Text of my commentary:

For those of you who haven’t been totally absorbed by the new mortgage rules, the CFPB has also been taking some very aggressive action against the largest auto lenders in the country in regard to Indirect rate practices. The issue is rate markups, the practice of allowing dealers to increase the lender’s “buy rate” and then compensating the dealers for that higher rate. Today’s press release from the CFPB announcing the settlement with Ally Financial is noteworthy for several reasons:

  1. The CFPB goes into some detail on how they did the analysis of whether borrowers in certain protected classes paid higher rates. Using address and surname information published by the US Census, they statistically determine whether the borrower is likely to be in these protected classes. This type of statistical analysis is probably way beyond the ability of credit unions to conduct properly.
  2. Ally, in addition to paying $80 million, is paying an additional $18 million to CFPB’s Civil Penalty Fund. This fund can be used to further compensate victims, but also can be used to fund further consumer education initiatives. Certainly, the CFPB will be very aggressive informing consumers of this type of settlement. While the monetary damages are significant, I’m not sure any credit union has really measured the impact of reputation risk to the organization from being the subject of this type of settlement.
  3. The amount of the rate disparity for the impacted groups should scare any credit union that does rate markups. If you read the entire press release, you’ll find that the markup difference between the protected classes and non-minority borrowers ranged between 20 and 29 basis points! The “first generation” of class action lawsuits against lenders about 15 years ago typically identified rate markup practices that resulted in disparities of several hundred basis points. The settlements typically included the lender’s agreement to limit these rate markups to between 150 and 250 basis points. The fact that the rate disparity ranged between 20 and 29 basis points really lowers the bar on the threshold of rate disparity. Will the CFPB pursue a lender for a 10 basis point disparity? I guess we’ll find out.

If you’re a credit union under the $10 billion threshold for a CFPB examination (virtually all of us are!) don’t relax. At the 2013 CUNA Lending Council conference held last month in Phoenix, we had the director of the Western Region of the CFPB speak to the attendees. While the CFPB has no direct supervisory power over your credit union, the director did state that the CFPB had unlimited ability to collect data from any credit union. The NCUA is also ramping up their Fair Lending initiatives, and we have to expect that they will be closely evaluating credit unions that allow rate markups. Whether the NCUA and the CFPB will be working together closely on “problem” credit unions is something that remains to be seen.

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