CFPB and DOJ Continue to Pursue Indirect Auto and Redlining Claims
By: Melanie Brody, Christa Bieker
The Department of Justice (“DOJ” or the “Department”) and the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) are increasingly pursuing lenders suspected of discriminatory lending practices. Last week, the DOJ and the CFPB announced two settlements with lenders resolving alleged violations of the Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act. These announcements come only days after the DOJ and the CFPB announced a consent order with Hudson City Savings Bank resolving allegations of racial redlining.
On September 28, the CFPB and the DOJ announced a consent order with Cincinnati-based Fifth Third Bank (“Fifth Third”) resolving allegations that Fifth Third’s indirect auto-lending pricing policies discriminated against African American and Hispanic borrowers. Although the CFPB does not have oversight over car dealers, the Bureau is able to investigate the auto loans that lenders like Fifth Third make through dealers. Coordinated investigations into Fifth Third’s indirect auto-lending business led the Bureau and the Department to conclude that African American and Hispanic borrowers paid approximately 35 or 36 basis points more, respectively, in dealer markups than similarly situated non-Hispanic white borrowers, which resulted in African American and Hispanic borrowers paying an average of $200 more for their car loans.
Regulators concluded that the disparities between minorities’ rates and the rates charged to similarly situated non-minority borrowers were based on race, and that Fifth Third’s indirect auto-lending program violated ECOA by permitting dealers to charge higher interest rates to borrowers on the basis of race and national origin. The agencies asserted that Fifth Third allowed dealers to add as much as 2.5 percentage points to buy rates set by Fifth Third and then compensated dealers based on the extra rate charged. The CFPB and the DOJ have been honing in on dealer markups, settling three dealer markup cases since last May. Last July, the CFPB and the DOJ announced a joint settlement of allegations that American Honda Finance Corporation, also an indirect auto lender, violated ECOA based on comparable claims that the lender’s dealer markup practices discriminated against minority borrowers. Two months earlier, Evergreen Bank Group settled similar claims. Further, in his testimony last week before the House Financial Services Committee, CFPB Director Richard Cordray said that the Bureau has moved in the direction of getting lenders to limit discretionary dealer markups.
Under the consent order, in addition to paying $18 million in consumer relief, Fifth Third agreed to reduce permissible dealer markups to 100–125 basis points depending on the loan term, and to either (i) allow exceptions to markups if properly documented and monitored or (ii) disallow dealer participation discretion altogether.
On September 29, one day after regulators announced the Fifth Third settlement, the DOJ announced an agreement with Eagle Bank and Trust Company (“Eagle Bank”), headquartered in Missouri, resolving allegations that the bank violated ECOA and the Fair Housing Act by redlining majority African American neighborhoods in and around St. Louis, Missouri. The Department found it significant that over the last 17 years, Eagle Bank opened 11 branches in the St. Louis area, but none were in majority-African American census tracts. In addition, the Department alleged that Eagle Bank unlawfully considered race in delineating its Community Reinvestment Act assessment area. Further, the Department conducted a statistical analysis of Eagle Bank’s residential real estate loan applications and originations from 2006 to 2012 and found statistically significant disparities with respect to the bank’s residential real estate lending activity between majority-white census tract residents and majority-African American census tract residents when compared with other lenders. For example, the analysis found that only 1.9 percent of Eagle Bank’s single-family residential loan applications in the St. Louis area were related to residential property located in majority-African American census tracts, while comparable lenders generated over five times that rate during the same time period.
Principal Deputy Assistant Attorney General Vanita Gupta stated, “The Department of Justice is committed to holding banks accountable for their role in continuing historic trends of residential segregation.” Among other obligations under the terms of the settlement agreement, Eagle Bank will open two new locations in majority-African American areas and invest at least $975,000 to provide programs designed to increase the amount of credit the bank extends to majority-African American areas as well as to increase consumer education, credit repair programs, and advertising in majority-African American areas.
As these recent settlements highlight, discrimination in both auto and mortgage lending continues to be a focal point for fair lending enforcement, with a particular emphasis on dealer markups and redlining. Lenders should consider evaluating their fair lending risk in these areas.