The Consumer Financial Protection Bureau (CFPB) announced two separate actions against Fifth Third Bank for discretionary auto loan pricings and for illegal credit card practices.
A joint enforcement action with the U.S. Department of Justice (USDOJ) requires the bank to change its pricing and compensation system to minimize the risks of discrimination, and pay $18 million to harmed black and Hispanic borrowers. For its deceptive marketing of credit card add-on products, the bank will provide an estimated $3 million in relief to eligible consumers and pay a $500,000 penalty.
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.
This resulted in minority borrowers paying higher dealer markups who were charged, on average more than $200 more for their auto loans. In doing so, the bank violated the Equal Credit Opportunity Act.
As part of the proposed order, 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 five years or less, and 1 percent for loans with longer terms. The bank can also move to non-discretionary dealer compensation. The bank will also hire a settlement administration to distribute the $18 million in damages to minority borrowers who loans were financed between January 2010 and September 2015. The company has already provided between $5 million and $6 million in refunds to some consumers.
Deceptive Marketing of Credit Card Products
From 2007 through February 2013, Fifth Third marketed and sold a debt protection plan 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 bank's telemarketers did not tell some of the cardholders that by agreeing to receive information about the produce, they were being enrolled and charged a fee. The fulfillment kits that were sent to customers contained incorrect descriptions of the product's costs, benefits, exclusions, and terms and conditions.
The administrative active requires the bank to pay $3 million in relief to about 24,500 customers, and a $500,000 fine.
More information about either action can be found on the CFPB website.