The Department of Justice announced a settlement of the federal government’s first-ever discrimination lawsuit involving “buy here, pay here” auto lending yesterday, according to a press release from the DOJ.
The lawsuit, filed in January 2014 by the DOJ and the State of North Carolina, alleged that Auto Fare Inc. and Southeastern Auto Corp. “violated the federal Equal Credit Opportunity Act by engaging in a pattern or practice of “reverse redlining” by intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases,” according to the release. The state of North Carolina also accused the BHPHs of actions that violated the state’s Unfair and Deceptive Trade Practices Act.
Specifically, in the lawsuit, the two dealerships were accused of having sales prices, down payments, and interest rates that were disproportionately high compared to other subprime used-car dealers. The DOJ said that because the dealerships did not “meaningfully assess the customers’ creditworthiness or ability to repay,” repossessions and rates of default were disproportionately high. Additionally, the dealerships engaged in repossessions when customers were not in default, according to the DOJ.
“All consumers deserve to be treated fairly when they buy a car,” North Carolina Attorney General Roy Cooper said in the release. “We hope this case sends a strong message that car dealers cannot use race when targeting buyers with overpriced cars and oppressive loans.”
Under the settlement, the dealerships will be required to implement a number of changes to ensure that loan terms and repossession practices are no longer unfair or predatory, according to the release, including “limiting projected monthly payments to no more than 25% of a borrower’s income; requiring interest rates to be at least five percentage points below the state’s rate cap; mandating a lower interest rate for borrowers who have specified evidence of lower credit risk.”
The settlement, which was reached after the court denied the dealerships’ motion to dismiss the case, is subject to court approval, and was filed yesteday in the U.S. District Court for the Western District of North Carolina.
“It is not only illegal, but also fundamentally wrong, to target borrowers of color for predatory loans and exploit their need for a car to do essential tasks such as getting to work,” Acting Assistant Attorney General Vanita Gupta of the Civil Rights Division said. “Combating discrimination in all segments of the auto lending market is, and will remain, a top priority for the Civil Rights Division. I am pleased that these dealerships have agreed to reform problematic lending and servicing practices and adopt policies that promote responsible lending. I hope that other buy here, pay here dealerships will evaluate their practices in light of this settlement.”
The settlement also requires the dealerships to establish a $225,000 settlement fund to compensate victims of their past discriminatory and predatory lending.