Fifth Third Bank ordered to pay $18M, reduce mark-up to 1.25% or less


First Ally Financial, then American Honda Finance Corp., and on Monday, the Consumer Financial Protection Bureau added Fifth Third Bank to its list of recipients of multi-million-dollar actions for what the regulators determined to be discrimination in vehicle financing.

As part of its $18 million penalty in the auto space, the CFPB and Department of Justice ordered Fifth Third Bank to substantially reduce or eliminate entirely dealer discretion. Officials told the bank to pay that $18 million to “harmed” African-American and Hispanic borrowers. Meanwhile the dealer participation stipulations included in the agreement are similar to what Honda Finance is being forced to do.

According to second quarter data from Experian Automotive, Fifth Third Bank tied for No. 15 in overall market share, holding 0.99 percent with fellow Midwestern commercial bank Huntington and USAA.

“We are committed to promoting fair and equal access to credit in the auto finance marketplace,” CFPB director Richard Cordray said. “Fifth Third’s move to a new pricing and compensation system represents a significant step toward protecting consumers from discrimination.”

Monday’s enforcement action is the result of a CFPB examination that began in January 2013. Over the time period under review, bureau officials indicated that Fifth Third permitted dealers to mark up consumers’ interest rates as much as 2.5 percent “while giving them the discretion to charge consumers different rates regardless of consumer creditworthiness.”

The examination evaluated Fifth Third’s indirect auto lending program for compliance with the Equal Credit Opportunity Act, which prohibits creditors from discriminating against loan applicants in credit transactions on the basis of characteristics such as race and national origin. The CFPB and DOJ’s joint investigation concluded that Fifth Third’s policies a pair of infractions, including:

• Resulted in minority borrowers paying higher dealer markups: Fifth Third violated the Equal Credit Opportunity Act by charging African-American and Hispanic borrowers higher dealer markups for their auto loans than non-Hispanic white borrowers. These markups were without regard to the creditworthiness of the borrowers.

• Injured thousands of minority borrowers: Fifth Third’s illegal discriminatory pricing and compensation structure meant thousands of minority borrowers from January 2010 through September of this year were charged, on average, more than $200 more for their vehicle installment contract.

The Dodd-Frank Wall Street Reform and Consumer Protection Act and federal fair lending laws authorize the CFPB and DOJ to take action against creditors engaging in illegal discrimination. The CFPB’s order was filed on Monday as an administrative action, and DOJ’s proposed order was filed in the U.S. District Court for the Southern District of Ohio.

“The measures provided in the orders will help ensure that illegal discrimination does not increase the cost of auto loans for consumers on the basis of race and national origin,” officials said.

Monday’s announcement arrived about two months after a report surfaced that Fifth Third Bank was about to be penalized

The Wall Street Journal cited what the report described as people familiar with the matter who indicated the CFPB was asking Fifth Third Bank to reduce the amount of dealer mark-up it allows in exchange for a reduced monetary settlement with the regulator.

Agreement details

Under the CFPB order, Fifth Third must:

• Substantially reduce or eliminate entirely dealer discretion: Fifth Third will reduce dealer discretion to mark up the interest rate to only 1.25 percent above the buy rate for auto loans with terms of 5 years or less, and 1 percent for auto loans with longer terms. Fifth Third also has the option under the order to move to non-discretionary dealer compensation.

The bureau said it did not assess penalties against Fifth Third because of the “proactive steps” the company is taking that directly address the fair lending risk of discretionary pricing and compensation systems by substantially reducing or eliminating that discretion altogether.

• Pay $18 million in damages for consumer harm: Fifth Third will pay $12 million into a settlement fund that will go to harmed African-American and Hispanic borrowers whose auto loans were financed by Fifth Third between January 2010 and September of this year.

Based on a determination by the DOJ and the CFPB, officials calculated Fifth Third will receive credit of between $5 million and $6 million for remediation it has already provided to harmed consumers whose auto loans were financed by Fifth Third from January 2010 through June of this year. Fifth Third will then pay any additional funds necessary into the settlement fund to bring its total payment to harmed consumers to $18 million.

• Pay to hire a settlement administrator to distribute funds to victims: A settlement administrator will contact consumers, distribute the funds, and ensure that borrowers who were harmed receive compensation.

The bureau said will provide contact information for the settlement administrator once that person is chosen to address questions that consumers may have about potential payments.

Pattern of settlements

In March 2013, the CFPB issued a bulletin explaining that it would hold indirect auto lenders accountable for unlawful discriminatory pricing. The bulletin also made recommendations for how indirect auto finance companies could ensure that they were operating in compliance with fair lending laws.

Then in December of that year, the bureau handed out a penalty topping $80 million against Ally.

In September of last year, the bureau issued an edition of Supervisory Highlights that explained that the CFPB’s supervisory experience suggests that significantly limiting discretionary pricing adjustments may reduce or effectively eliminate pricing disparities.

“Substantial limits on discretionary pricing like those imposed by Monday order can address the type of fair lending risk identified in the CFPB’s bulletin and Supervisory Highlights,” officials said.

Officials recapped that Monday’s auto lending action is part of a larger joint effort between the CFPB and DOJ to address discrimination in the indirect auto lending market.

Most recently, in July, the CFPB and DOJ took an action against Honda Finance requiring the captive to pay $24 million in consumer restitution and take the same steps to substantially reduce or eliminate entirely dealer discretion.

DOJ officials cheered Fifth Third Bank for accepting terms of the agreement outlined on Monday.

“We commend Fifth Third for its commitment to treating all of its customers fairly without regard to race or national origin and its leadership in agreeing to impose lower caps on discretionary markups,” said principal deputy assistant attorney general Vanita Gupta, head of the Civil Rights Division.

“This agreement shows that the indirect auto lending industry is moving toward a model of dealer compensation that fairly compensates dealers for their work related to loans, while limiting the dealer markup that leads to discriminatory pricing,” Gupta continued.

U.S. Attorney Carter Stewart of the Southern District of Ohio added, “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.”