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Fifth Third Bank to Cap Dealer Markups

September 29, 2015

By Brittany-Marie Swanson

WASHINGTON, D.C. — Nearly two months after media outlets reported that Fifth Third Bank was being pressured by the Consumer Financial Protection Bureau (CFPB) to change its dealer markup policies, the finance source has entered into a consent order with the bureau and the Department of Justice (DOJ) related to its auto lending business.

Under the terms of the consent order, Fifth Third Bank will pay $18 million to African-American and Hispanic borrowers who were allegedly harmed by its auto lending policies. According to the bureau, those customers paid, on average, $200 more for auto loans than similarly situated white buyers due to policies that allow dealers to markup up the interest rate on retail installment sales contracts as compensation for arranging financing.

Bureau officials noted in a press release Monday that Fifth Third is being credited between $5 million and $6 million toward the $18 million in restitution payments based on remediation it already provided to minority borrowers.

“It is important to understand that Fifth Third is not involved in the transaction between dealers and their customers,” the finance source said in an emailed statement to F&I and Showroom. “… 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.”

Like Honda Finance Corporation, which agreed to limit dealer markups in July, Fifth Third will cap dealer markups at 1.25% above the buy rate for auto loans with terms of five years or less, and 1% for auto loans with longer terms. The finance source had been monitoring the effect of dealer markups on its auto loan portfolio since 2013, but according to the consent order, it “failed to take timely and adequate action to address markup disparities” it had identified.

“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,” the finance source noted in its statement. During the CFPB and DOJ’s examination period, Fifth Third had limited dealer markup to 175 to 250 basis points with variation based on term, geography and time period.

Information about ethnicity or race is not included on retail installment sales contracts, but the regulators used proxy methodology to determine that Fifth Third purchased “thousands” of contracts involving African-American and Hispanic borrowers. However, based on internal documents it obtained, American Banker reported this month that CFPB officials have acknowledged that the bureau’s methodology often overestimates potential bias, resulting in higher penalties for finance sources cited by the regulator.

“Nothing in the American Banker story disputes the existence of discrimination in auto lending, or that minority borrowers have been charged higher interest rates on their loans as a result,” CFPB Spokesperson Samuel Gilford told F&I and Showroom in an email.

Also on Monday, the CFPB and DOJ announced a second action against Fifth Third Bank related to the marketing of its credit card add-on products. The finance source will pay $3 million in restitution to 24,500 customers who were charged a fee for a “debt protection” product without being properly informed of the cost, and a $500,000 penalty.

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