Record $98 Million for Bias in Auto Lending

DETROIT (CN) - Detroit-based Ally Bank will pay $98 million to settle a Justice Department complaint involving 235,000 car loans to minorities - the largest discriminatory lending settlement ever against an auto lender.

The United States filed the settled complaint against Ally Financial and Ally Bank in Federal Court.

Ally Financial is a bank holding company; Ally Bank does not have physical branches, only offers mobile and online banking.

Ally has been named "Best Online Bank" by Money magazine three years in a row, and advertises itself as having "No hidden fees."

It is one of the largest automobile lenders in the United States, having funded nearly 3 million loans since April 2011, totaling more than $20 billion, according to the complaint.

But it charges minorities higher rates than white people, the Justice Department claims in the lawsuit.

"Between April 2011 and the present, this system caused approximately 100,000 African-American borrowers, 125,000 Hispanic borrowers, and 10,000 Asian/Pacific Islander borrowers to pay Ally higher interest rates for their automobile loans than non-Hispanic white borrowers because of their race or national origin and not based on their creditworthiness or other objective criteria related to borrower risk," the complaint states. "The average African-American victim was obligated to pay over $300 more during the term of the loan because of discrimination, and the average Hispanic and Asian/Pacific Islander victim was obligated to pay over $200 more during the term of the loan because of discrimination."

Ally's policy allows dealers to mark up a customer's interest rate beyond the rate calculated by Ally Bank based on objective criteria related to the customer's credit risk.

"Ally typically retains a portion of the profits earned from this interest rate markup and pays the remainder to dealers. As a result, Ally's policy and practice creates financial incentives for dealers to mark up borrowers' interest rates above those established based on the consumer's creditworthiness or other objective criteria related to borrower risk," the complaint states.

"From at least April 2011 and continuing to the present, Ally has not provided adequate constraints or monitoring across its portfolio of loans to prevent discrimination from occurring through charging markups despite knowing or having reason to know that its policy and practice of allowing dealers to mark up consumers' interest rates creates a substantial risk of discrimination. Ally conducted no monitoring of markup disparities until March 2013, and its monitoring since then has been entirely inadequate."

Of the $98 million settlement, $80 million will be paid to compensate victims of discrimination; $18 million is a civil penalty.

The bank also must refund discriminatory overcharges to borrowers for the next three years "unless it significantly reduces disparities in unjustified interest rate markups," the Justice Department said in a statement.

It's the largest settlement ever in an auto loan discrimination case, Attorney General Eric Holder said in a statement.

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