Detroit — The Department of Justice (DOJ) and the Consumer Financial Protection Bureau (CFPB) announced Friday the federal government’s largest auto loan discrimination settlement in history to resolve allegations that Detroit-based Ally Financial Inc. and Ally Bank have engaged in an ongoing nationwide pattern or practice of discrimination against African-American, Hispanic and Asian/Pacific Islander borrowers in their auto lending since April 1, 2011.

The agreement is the first joint fair lending enforcement action by the department and CFPB. With this agreement, eight of the top 10 largest fair lending settlements in the department’s history have been under U.S. Attorney General Eric Holder’s leadership.

The settlement provides $80 million in compensation for victims of past discrimination by one of the nation’s largest auto lenders, and requires Ally to pay $18 million to the CFPB’s Civil Penalty Fund. Ally also must refund discriminatory overcharges to borrowers for the next three years unless it significantly reduces disparities in unjustified interest rate markups. This system will create a strong financial incentive to eliminate discriminatory overcharges.

“With this largest-ever settlement in an auto loan discrimination case, we are taking a firm stand against discrimination in a critical lending market,” said Holder. “By requiring Ally to provide refunds to those who are overcharged because of their race or national origin, this agreement will ensure relief for Americans who are victimized. It will enable the Justice Department and the CFPB to work closely with Ally and others to prevent discriminatory practices in the future. And it will reinforce our determination to respond aggressively to discrimination in America’s lending markets — wherever it is found.”

The settlement resolves claims by the department and the CFPB that Ally discriminated by charging approximately 235,000 African-American, Hispanic and Asian/Pacific Islander borrowers higher interest rates than non-Hispanic white borrowers. The agencies claim that Ally charged borrowers higher interest rates because of their race or national origin, and not because of the borrowers’ creditworthiness or other objective criteria related to borrower risk.

The average victim paid between $200 and $300 extra during the term of the loan. The Equal Credit Opportunity Act (ECOA) prohibits such discrimination in all forms of lending, including auto lending. Ally’s settlement with the DOJ, which is subject to court approval, was filed in the U.S. District Court for the Eastern District of Michigan in conjunction with the DOJ’s complaint. Ally resolved the CFPB’s claims by entering into a public administrative settlement.

“Discrimination is a serious issue across every consumer credit market,” said CFPB Director Richard Cordray. “We are returning $80 million to hard-working consumers who paid more for their cars or trucks based on their race or national origin. We look forward to working closely with the Justice Department and Ally to make sure this serious issue will be addressed appropriately in the years ahead as well.”

Rather than taking applications directly from consumers, Ally makes most of its loans through over 12,000 car dealers nationwide who help their customers pay for their new or used car by submitting their loan application to Ally. Ally’s business practice, like most other major auto lenders, allows car dealers discretion to vary a loan’s interest rate from the price Ally initially sets based on the borrower’s objective credit-related factors.

Dealers receive greater payments from Ally on loans that include a higher interest rate markup. The coordinated investigations by the department and the CFPB that preceded the settlement determined this system of subjective and unguided pricing discretion directly results in Ally’s qualified African-American, Hispanic and Asian/Pacific Islander borrowers paying more than qualified non-Hispanic white borrowers.

The agencies claim that Ally fails to adequately monitor its interest rate markups for discrimination or require dealers to document their markup decisions. Ally’s first effort to monitor for discrimination in interest rate markups began only earlier this year after it learned of the CFPB’s preliminary findings of discrimination, and resulted in only two dealers being sanctioned and subjected to nothing more than voluntary training.

“Ally does not make loans directly to consumers, but rather, it purchases installment contracts originated by auto dealers,” Ally said in a statement. “Ally’s long-time process for evaluating auto installment contracts from dealers does not include information on a consumer’s race or ethnicity. Ally assesses these contracts and sets pricing based solely on a consumer’s creditworthiness and contract characteristics.

“The CFPB and DOJ assert that pricing disparity has occurred for certain protected classes of consumers as a result of the auto dealer’s ability to mark-up Ally’s rate at which it buys a retail installment contract,” the statement continued. “The CFPB and DOJ also assert that Ally has responsibility for the conduct of its dealer customers and allege that Ally has not sufficiently monitored the pricing practices of its dealer customers.

“Ally does not engage in or condone violations of law or discriminatory practices, and based on the company’s analysis of its business, it does not believe that there is measurable discrimination by auto dealers.”

The settlement represents the first resolution of the department’s joint effort with the CFPB to address discriminatory auto lending practices. The 2010 Dodd-Frank Act gave both the DOJ and the CFPB authority to take action against large banks like Ally for violating the ECOA. Although the department has filed previously filed lawsuits alleging violations of ECOA involving car loans, today is the first ECOA lawsuit against an auto lender that operates nationwide.

“This settlement provides relief to those who were harmed by this discrimination,” said U.S. Attorney for the Eastern District of Michigan Barbara McQuade. “Lenders must consider an individual borrower’s credit worthiness, based on income, savings, credit history and other objective factors when determining the terms of a loan. This settlement will ensure that in the future, borrowers will be able to obtain loans from Ally based on their own credit history free from discrimination based on race or national origin.”

In addition to the $98 million in payments for its past conduct and requirement to refund future discriminatory charges, the settlement requires Ally to improve its monitoring and compliance systems. The settlement allows Ally to experiment with different approaches toward lessening discrimination and requires it to regularly report to the department and the CFPB on the results of its efforts as well as discuss potential ways to improve results.

The settlement provides for an independent administrator to locate victims and distribute payments of compensation at no cost to borrowers whom the department and the CFPB identify as victims of Ally’s discrimination. The department and the CFPB will make a public announcement and post information on their websites once more details about the compensation process become available. Borrowers who are eligible for compensation from the settlement will be contacted by the administrator, and do not need to contact the department or the CFPB at this time.