CLEVELAND, Ohio -- Fifth Third Bank discriminated against black and Hispanic consumers by charging some higher interest rates on auto loans with no justification related to credit-worthiness, the Consumer Financial Protection Bureau said Monday afternoon. In a separate issue, the bank also engaged in illegal credit card practices, the regulator said.
The CFPB is requiring Fifth Third -- which is Ohio's largest bank by assets -- to pay $18 million to minority auto loan customers and $3 million to credit card customers.
The action by the CFPB and the Department of Justice also requires Cincinnati-based Fifth Third to change its pricing and compensation structure to reduce the chance of discrimination.
"Consumers deserve a level playing field when they enter the marketplace, especially when financing an automobile," U.S. Attorney Carter M. Stewart of the Southern District of Ohio said in a statement. "This settlement prevents discrimination in setting the price for auto loans."
Fifth Third is the ninth-largest bank indirect auto lender in the United States. Indirect lenders work with auto dealers. The banks set a risk-based interest rate, known as the "buy rate." Dealers are then able to charge consumers a higher interest rate as a way to make more money. "Over the time period under review, Fifth Third permitted dealers to mark up consumers' interest rates as much as 2.5 (percentage points)," the CFPB said.
The CFPB and Department of Justice investigation that started 2-1/2 years ago found that:
- Fifth Third violated the Equal Credit Opportunity Act by charging black and Hispanic customers higher dealer markups on auto loans than white borrowers. The markups had nothing to do with credit worthiness, the CFPB said.
- The higher rates cost thousands of minority borrowers extra finance charges. The customers paid an average of $200 more in interest from January 2010 through this month than they should have paid.
In a written statement, Fifth Third said it takes the allegations by CFPB and DOJ very seriously and has agreed to the consent orders and wants to get the issues resolved.
"The orders do not relate to auto loans Fifth Third makes directly with customers, but instead involve retail installment contracts originated by auto dealers and then purchased by Fifth Third," the bank said. "In reaching this settlement, Fifth Third stands firm in its conviction that we have treated and will continue to treat our customers in a fair, open and honest manner.
"Fifth Third strongly opposes any type of discrimination and has, for many years, monitored for and taken steps to avoid any potential discrimination in its auto finance business, as well as all other areas in which we interact with consumers.
"It is important to understand that Fifth Third is not involved in the transaction between dealers and their customers. Instead, dealers ask Fifth Third for an offer to purchase the contracts they enter into with customers at a discount (often referred to as the "buy rate"). The difference between the buy rate and the rate paid by the customer is referred to as "dealer markup" and is the amount the dealer earns for that transaction.
"Fifth Third also limits the amount that dealers can earn through dealer markup, and we are further reducing that as a result of this settlement," the bank said, adding, "When considering whether to purchase a contract from a dealer, Fifth Third does not receive or consider any information about a consumer's race or ethnicity."
Under the CFPB order, Fifth Third must:
- Allow auto dealers to mark up interest rates by only 1.25 percentage points above the buy rate when the loan is for five years or less, and by only 1 point for loans of more than five years.
- Pay $18 million in damages, including paying $12 million that will go to black and Hispanic customers whose auto loans went through Fifth Third between January 2010 and September 2015.
- Hire a settlement administrator to distribute money to victims.
Fifth Third spokesman Larry Magnesen declined to say whether the bank is severing ties with any auto dealers as a result of this issue, or whether the bank will use any safeguards in the future to avoid or catch problems like this.
In a separate issue, Fifth Third also violated laws regarding credit cards, the CFPB said. The Dodd-Frank Act prohibits credit cards issuers from peddling "debt protection" products in a deceptive manner. From 2007 through early 2013, Fifth Third marketed this product through telemarketing calls and online pitches.
But the telemarketers didn't tell some customers that if they agreed to get information about the product, then they would be automatically enrolled and charged a fee. In addition, the information provided to some customers contained inaccuracies about the product's costs, benefits, exclusions, terms, and conditions.
The CFPB's order requires Fifth Third to stop the illegal practices and pay $3 million in relief to about 24,500 customers and pay a $500,000 penalty to the CFPB civil penalty fund.