WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) announced two separate actions against Fifth Third Bank, for discriminatory auto loan pricing and for illegal credit card practices. The joint CFPB and Department of Justice (DOJ) auto-lending enforcement action requires Fifth Third to change its pricing and compensation system to minimize the risks of discrimination, and to pay $18 million to harmed African-American and Hispanic borrowers. The CFPB’s action against Fifth Third’s deceptive marketing of credit card add-on products requires the bank to provide an estimated $3 million in relief to eligible harmed consumers and pay a $500,000 penalty.
“We are committed to promoting fair and equal access to credit in the auto finance marketplace,” said CFPB Director Richard Cordray. “Fifth Third’s move to a new pricing and compensation system represents a significant step toward protecting consumers from discrimination. We are also obtaining millions of dollars in relief today for consumers affected by deceptive marketing of credit add-on products.”
“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.”
“Consumers deserve a level playing field when they enter the marketplace, especially when financing an automobile,” said U.S. Attorney Carter M. Stewart of the Southern District of Ohio. “This settlement prevents discrimination in setting the price for auto loans.”
Fifth Third Bank is a regional bank and insured depository institution. It is headquartered in Cincinnati, Ohio, primarily serving states in the Midwest and Southeast. The bank operates approximately 1,300 branches in 12 states, offering financial services including credit cards, mortgages, home equity lines of credit, and auto loans.
Auto-Lending Enforcement Action
Auto loans are the third-largest source of outstanding household debt in the United States, after mortgages and student loans. When consumers finance automobile purchases from an auto dealership, the dealer often facilitates indirect financing through a third-party lender like Fifth Third, which is the ninth largest depository indirect auto lender in the United States.
As an indirect auto lender, Fifth Third sets a risk-based interest rate, or “buy rate,” that it conveys to auto dealers. The bank then allows auto dealers to charge a higher interest rate when they finalize the deal with the consumer. This is typically called “dealer markup.” Markups can generate compensation for dealers while giving them the discretion to charge consumers different rates regardless of consumer creditworthiness. Over the time period under review, Fifth Third permitted dealers to mark up consumers’ interest rates as much as 2.5 percent.
Today’s enforcement action is the result of a CFPB examination that began in January 2013. 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:
- 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 2015 were charged, on average, over $200 more for their auto loans.
Auto Lending Enforcement Action
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 today 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. 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 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 2015. Based on a determination by the DOJ and the CFPB, 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 2015. 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 will provide contact information for the settlement administrator once that person is chosen to address questions that consumers may have about potential payments.
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 lenders could ensure that they were operating in compliance with fair lending laws. In September 2014, the Bureau issued an edition of Supervisory Highlights that explained that the Bureau’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 today’s order can address the type of fair lending risk identified in the CFPB’s bulletin and Supervisory Highlights.
Today’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 2015, the CFPB and DOJ took an action against American Honda Finance Corporation requiring Honda to pay $24 million in consumer restitution and take the same steps to substantially reduce or eliminate entirely dealer discretion.
Credit Card Enforcement Action
The CFPB is also taking action today against Fifth Third for violations of the Dodd-Frank Act for deceptive acts or practices in the marketing and sales of its “Debt Protection” credit card add-on product. This is the 11th credit card add-on enforcement action the Bureau has taken against companies for illegal practices in the marketing or administration of add-on products and services.
From 2007 through February 2013, Fifth Third marketed and sold the product to its customers during telemarketing calls and online. The product promised to allow enrolled cardholders to request the cancellation of credit card payments if they experienced certain hardships such as job loss, disability, and hospitalization. Depending on the version of the product, consumers who enrolled were charged a monthly fee of either 0.81 percent or 0.89 percent of their card balance. In September 2012, Fifth Third ceased telemarketing the product and ceased all other enrollments in February 2013.
The Bureau found that Fifth Third’s telemarketers deceptively marketed the add-on product during calls. For example, telemarketers did not tell some cardholders that by agreeing to receive information about the product, they were being enrolled and would be charged a fee. In addition, from December 2011 through September 2012, Fifth Third sent cardholders product “fulfillment kits” that contained incorrect descriptions of the product’s cost, benefits, exclusions, terms, and conditions. Among other things, Fifth Third’s illegal practices included: misrepresenting costs and fees for coverage; misrepresenting or omitting information about eligibility for coverage; and illegal practices in the enrollment process.
The CFPB’s order was filed today as an administrative action. The CFPB’s order requires that Fifth Third provide $3 million in relief to roughly 24,500 customers, cease engaging in illegal practices, and pay a $500,000 penalty to the CFPB civil penalty fund.
For auto loan or credit card questions or to submit a complaint, consumers can contact the CFPB at (855) 411-2372 or visit consumerfinance.gov.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.