Ally Financial settlement with U.S. on auto loan discrimination signals more regulatory reprisals

Ally Financial settlement with U.S. on auto loan discrimination signals more regulatory reprisals

Last weekends announcement that Ally Financial settled with the federal government for

$98 million triggered statements from the highest levels of the Obama Administration, starting

with Attorney General Eric Holder who described it as the largest settlement ever in an auto

loan discrimination case, followed by CFPB Director Richard Cordrays promise to return $80

of the $98 million to the hard working consumers who paid more for their cars and trucks based

on their race and national origin. The remaining $18 million of the $98 million payout from

Ally will go to the Consumer Finance Protection Bureaus civil penalty fund.

Federal investigators alleged that Ally had discriminated against 235,000 African American,

Hispanic and Asian car buyers seeking loans from April, 2011 to April, 2012. The government

premised its case upon an analysis of 800,000 surnames of credit customers, which it said in its

complaint, is a widely accepted methodology by social scientists for determining race and

ethnicity. The government said its research revealed that African Americans paid on average

$300 more over the life of an auto loan than whites, while Hispanics and Asians averaged $200

more. In a statement on the settlement, Ally denied any intentional wrong doing, contending,

essentially, that they underwrite loan applications they get from dealers on the basis of credit

history or credit-worthiness, with no knowledge of any applicants race, ethnicity or national

origin.

Settling this case with the government likely reflects the state of the law on discrimination being

a matter of measured results of a commercial activity rather than any intention to discriminate by

the product or service provider charged by the government.

This development, accordingly, spotlights the genesis of the position first taken last spring by the

new Consumer Finance Protection Bureau that banks they regulate should fashion different

compensation arrangements for dealers with whom they partner and receive loan referrals such

that dealer compensation would be a flat amount rather than based on a sliding scale. This

development also portends that additional enforcement actions are in the offing against financial

institutions extending auto loans.

Ally, formerly GMAC, received $17 million as part of the U.S. bailout of General Motors in

2009 during the great recession and reportedly still needs to repay nearly $5 million dollars. The

unmistakable irony here, of course, is that the same federal government garnering these

substantial lawsuit settlement dollars from Ally is the same Ally the same federal government

bailed out four years ago to keep them afloat.