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JPMorgan Chase : J.P. Morgan in Talks With Justice Department Over Auto Loan Pricing

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02/24/2015 | 04:40pm EDT
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 originated $6.9 billion in auto loans in the latest quarter, up from $6.4 billion in the fourth quarter of 2013. 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

Corrections & Amplifications

This item was corrected at 6:00 p.m. ET to show that J.P. Morgan originated $6.9 billion in auto loans in the latest quarter, up from $6.4 billion in the fourth quarter of 2013. The original misstated the figure as $54.5 billion.

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