Fifth Third (FITB) Agrees to Settle Suit on Unfair Practices

As regulators are striving to wipe out discrimination against minority borrowers in the auto loan industry, on Monday, Fifth Third BancorpFITB agreed to settle the lawsuit by paying $18 million under which the bank was sued for encouraging discriminatory indirect auto lending practices. The settlement agreement was entered with the U.S. Department of Justice ("DOJ") and the Consumer Financial Protection Bureau ("CFPB").

The DOJ and CFPB's investigation into discrimination against minority borrowers in the auto loan industry focuses on a practice called "dealer markup" or "dealer participation". Banks serve as indirect lenders, facilitating dealers to add to the interest rate the banks levy and gain on the difference. It is criticized that the practice empowers dealers with much flexibility to move certain consumers into costlier loans. CFPB has stated that lowering the potential markups is likely to reduce the risk of discrimination.

Notably, in May 2014, Fifth Third revealed that the DOJ was probing whether the bank resorted to discriminatory practices related to its indirect automobile loan portfolio. Last month, Fifth Third was also urged by the CFPB to change its auto-lending practices. The regulator proposed the bank to cut the markup it provides to car dealers as part of auto loans. Therefore, Fifth Third has agreed to the CFPB's proposals among other banks under probe along with the settlement.

Terms of the Settlement

As per the terms of the settlement, African-American and Hispanic borrowers who were overcharged $200 over the life of a loan following discriminatory practice for their car loans will be compensated. Moreover, the bank will reduce its dealer markup to 1.25% for loans of less than or equal to 60 months and to 1% for loans over 60 months. Further, Fifth Third's monitoring and compliance systems also need to be improvised.

"In reaching this settlement, Fifth Third stands firm in its conviction that we have treated and will continue to treat our customers in a fair, open and honest manner," it said in the statement. "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."

Justice Department Principal Deputy Assistant Attorney General Vanita Gupta, head of the Civil Rights Division, said in a release, "We commend Fifth Third for its commitment to treating all of its customers fairly without regard to race or national origin and its leadership in agreeing to impose lower caps on discretionary markups. This agreement shows that the indirect auto lending industry is moving toward a model of dealer compensation that fairly compensates dealers for their work related to loans, while limiting the dealer markup that leads to discriminatory pricing."

Another Settlement

Notably, the bank will separately pay $3.5 million for settlement of the claims related to its credit card sales practices including $500,000 civil penalty. However, the settlement agreement awaits court approval.

It was revealed by the CFPB, between 2007 and 2013, Fifth Third's telemarketers deceived credit card customers by selling debt protection coverage misrepresenting expenses and fees related to the product.


The federal regulators have taken a firm stand against auto loan discrimination and tightened its reins on the subprime auto lending market to address this issue. The active investigations and eventual settlements resulted in reimbursement of nearly $136 million to 425,000 customers, who were victims of the unfair pricing due to auto lenders' discrimination.

Most recently, Hudson City Bancorp, Inc. HCBK agreed to settle a similar lawsuit. The bank was accused of violating the Fair Housing Act and Equal Credit Opportunity Act. Both DOJ and CFPB investigated Hudson City's lending practices in majority-Black and Hispanic areas mostly outside New Jersey from 2009 to 2013 and concluded that the bank used racial criteria to direct potential borrowers toward certain neighborhoods and determined their eligibility for loans. We note that, as per the DOJ, such discriminatory practice is referred as 'redlining'.

Among other mortgage lenders - Citigroup Inc. C , JPMorgan Chase & Co. JPM and Bank of America Corp. (BAC) were also sued for discrimination in lending practices. Deutsche Bank AG had also been previously accused by Los Angeles of letting the foreclosed homes in low-income regions deteriorate to poor conditions. The case was settled in June 2013.

For banks, legal headwinds are on the rise. They continue to face several cases and probes regarding their business conduct preceding the financial crisis. Though the banks have resolved many such issues in the past years, increasing legal hassles keep dragging their financials downward.

Fifth Third currently carries a Zacks Rank #4 (Sell).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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