CINCINNATI – Fifth Third Bank will pay $18 million to settle allegations it discriminated against black and Hispanic consumers by charging some higher interest rates on auto loans.
An investigation by the Department of Justice showed Fifth Third’s qualified minority borrowers paid more than white borrowers due to discriminatory practices, according to the Consumer Financial Protection Bureau.
The complaint against Fifth Third claims the average African-American and Hispanic borrower was obligated to pay about $200 more during the term of the loan.
"At first blush I was absolutely surprised," Urban League of Greater Cincinnati President and CEO Donna Jones Baker said of learning about the settlement and allegations. "We are all happy about the fact that there are checks and balances, systems in place, to catch patterns of discrimination."
The Department of Justice and the Consumer Financial Protection Bureau announced the settlement Monday. The $18 million payout is subject to court approval and includes compensation for borrowers who were overcharged.
The agreement also requires changes to the way the Cincinnati-headquartered banking corporation prices automobile loans. Specifically, Fifth Third has agreed to limit dealer markup to 125 basis points, or 1.25 percent, for loans of 60 months or less, and to 100 basis points, or one percent, for loans greater than 60 months.
“Consumers deserve a level playing field when they enter the marketplace, especially when financing an automobile,” U.S. Attorney Carter M. Stewart said. “This settlement prevents discrimination in setting the price for auto loans.”
The Department of Justice's investigation relates to what are called “indirect” auto loans, because -- rather than taking applications directly from consumers -- the bank makes most of its auto loans through car dealers nationwide who help their customers pay for their new or used car by submitting their loan application to Fifth Third.
Fifth Third’s business practices allowed car dealers discretion to mark up a loan’s interest rate from the price Fifth Third initially sets based on the borrower’s objective credit-related factors. Dealers received greater payments from Fifth Third for loans that included a higher interest rate markup.
In an official statement, the company said it "stands firm in its conviction" that it has treated and will continue to treat 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," Fifth Third officials said.
In the statement, provided by Fifth Third Director of Corporate Communications Larry S. Magnesen, the company reiterates Fifth Third is not involved in the transaction between dealers and their customers.
How they break it down: 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 are further reducing that as a result of Monday's settlement.
Monday’s settlement – once approved -- means an independent administrator will distribute money at no cost to borrowers whom the Department of Justice identifies as victims of discrimination.
“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."
John Matarese contributed to this report.