By Alan Zibel And Emily Glazer
J.P. Morgan Chase & Co. said it is in discussions with the
Justice Department as part of a federal probe into whether auto
lenders are doing enough to prevent dealers from charging higher
interest rates to minorities.
The largest U.S. bank by assets said in a securities filing
disclosed Tuesday afternoon it is in talks with the Justice
Department about potential statistical disparities in interest
rates for auto loans originated by car dealers, according to the
filing.
The bank has been in discussions with the Justice Department for
weeks, people familiar with the matter said. It is unclear when or
if a resolution, settlement or civil lawsuit filed by the
government will occur.
The filing comes amid a joint effort by the Justice Department
and Consumer Financial Protection Bureau to scrutinize the
auto-loan industry's practice of allowing car dealers to vary
interest rates charged to consumers. Dealers make more of a profit
from higher rates.
Federal officials say this system provides a financial incentive
for dealers to charge higher rates to some customers, increasing
the risk of discrimination. They have been seeking to hold banks
and nonbank lenders liable for dealers' actions.
The CFPB "has focused significant resources on rooting out
discrimination" in the auto-loan market, CFPB Director Richard
Cordray said in a speech earlier this week.
In late 2013, Ally Financial Inc. agreed to a $98 million
settlement with the CFPB and Justice Department to settle the probe
of alleged discrimination and didn't admit or deny the allegations.
In addition, several other unnamed lenders have settled allegations
privately, Mr. Cordray said, resulting in a total of $136 million
in compensation being provided to 425,000 customers.
In late 2014, the finance units of Honda Motor Co. and Toyota
Motor Co., warned in regulatory filings they could be subject to
federal enforcement actions by the CFPB and Justice Department over
their loan-pricing practices. The companies both said they would
cooperate with the government agencies.
J.P. Morgan is the fifth-largest retail auto lender with around
14,500 dealers. It made $54.5 billion in auto loans for most recent
quarter ending December 31, up 3% from the year-earlier period. It
holds $53.6 billion in auto assets, according to its most recent
earnings filing.
In addition, CFPB officials have said they are pushing lenders
to do a better job of monitoring their own loan policies to prevent
dealers from discriminating.
"Some lenders have done a much better job of managing their
compliance programs and have been able to limit the size of the
disparities," Mr. Cordray said in a speech last fall.
The antidiscrimination push from CFPB has prompted criticism
from lawmakers and industry groups who say the government probe
rests on uncertain evidence of discrimination. They say the CFPB
has used a flawed statistical method for determining whether
minority borrowers received higher interest rates.
Auto lenders, unlike mortgage lenders, aren't permitted to
inquire about a borrower's race. Critics argue that the statistical
method used by the CFPB is only able to provide a probability of a
borrower being a minority based on their last name and address.
Critics including the U.S. Chamber of Commerce and industry
lawyers say the CFPB would have been better off pushing for changes
in the auto-loan industry by going through a public rule-making
process.
Auto dealers aren't subject to the CFPB's oversight under an
exemption included in the 2010 Dodd-Frank financial law, but CFPB
officials have the power to oversee bank lenders and auto finance
companies. Last September, the CFPB formally proposed to start
supervising the finance units of major car companies, focusing on
the 38 largest nonbank lenders in the automotive sector.
Write to Alan Zibel at alan.zibel@wsj.com and Emily Glazer at
emily.glazer@wsj.com
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