CFPB Orders Fifth Third Bank To Pay $12 Million For Auto Loan Discrimination

The Consumer Financial Protection Bureau has taken action against Fifth Third Bank for alleged discriminatory auto loan practices. Fifth Third bank is being required to payout $12 million to African American and Hispanic borrowers whom the CFPB feels were discriminated against. From a CFPB perspective, this multi-million dollar settlement is meant to prevent discrimination. In a CFPB press release, U.S. Attorney Carter M. Stewart of the Southern District of Ohio said, “Consumers deserve a level playing field when they enter the marketplace, especially when financing an automobile. This settlement prevents discrimination in setting the price for auto loans.”

Fifth Third is also facing regulatory changes imposed by the CFPB. The rate by which dealers can discount auto financing is limited to a maximum of 1.25 percent for loans of five years or less and then a cap at 1 percent for loans lasting longer. Fifth Third bank also has to hire a settlement administrator to distribute the funds. The CFPB press release indicates that thousands of minority borrowers had higher auto loans by an average of “over $200.” That amounts to around three dollars per month for a five-year loan and four dollars per month for a four-year loan.

NADA doesn’t agree with the actions on the part of the CFPB. In a press release from NADA, Chairman Bill Fox said, “By cutting the discount zone so dramatically, the government has significantly reduced the amount of money consumers can save on auto financing at the dealership. Between 70-80 percent of new-car buyers rely on dealerships to help them find competitive financing, and the fact is that most consumers get a better rate at the dealership because of the rate discounts that are only available at the dealership. Consumers have every right to continue benefiting from a system that saves them money every day, but bank-by-bank, percent-by-percent, the CFPB is taking those rights away, and without giving consumers any say in the matter.”

As we’ve reported on several times, the methodology by which the CFPB decides who is of a certain race that may have been discriminated against has come into question. We told you before the proxy methodology employed by the CFPB has been found to correctly identify race in some instances 25 percent of the time. However, earlier this week the CFPB acknowledged the potential for error but said that it’s better safe than sorry. As indicated in one of our stories this week, Patrice Ficklin, assistant director of the CFPB Office of Fair Lending, sent out an internal agency memo which read in part that the agency’s methodology, “is valid and reasonable under the circumstances here, and although there may be some risk of overestimating disparities, the alternative presents an equal (and perhaps greater) risk of underestimating disparities and thus consumer harm.”

Remember, the CFPB is prevented from directly regulating dealers due to a specific provision in the 2010 Dodd-Frank Wall Street Reform Act, however, their growing interest in auto lending could be viewed as a type of indirect regulatory authority. What do you think of the CFPB’s latest regulatory move? What lasting impact do you think CFPB regulations will have on the retail automotive industry?