The U.S. Department of Justice (DOJ), the U.S. Attorney’s Office, and the North Carolina Attorney General filed a complaint last week against two corporations that own two “buy here, pay here” used car dealerships, as well as the corporations’ president. The complaint, filed in a North Carolina federal court, alleges that the defendants violated the federal Equal Credit Opportunity Act (ECOA) by engaging in “reverse redlining.” The defendants’ actions were also alleged to violate the state’s Unfair and Deceptive Trade Practices Act (UDTPA).

According to the complaint, the defendants discriminated against credit applicants on the basis of race in violation of the ECOA by intentionally targeting African American customers for retail installment sale contracts that contained unfair and predatory credit terms, a practice that has been termed “reverse redlining.” The credit terms were alleged to be unfair and predatory because:

  • The defendants allegedly charged sales prices that were in excess of industry standard suggested retail prices and far in excess of the wholesale prices paid by the defendants for the cars at auction.
  • The customers allegedly incurred disproportionately high down payments, annual percentage rates, and default and repossession rates as compared to customers of other subprime used car dealers (with the APRs in the majority of cases exceeding state APR limits).

The complaint alleges that the defendants had not “meaningfully assessed the customers’ creditworthiness” and were “setting up African American customers to fail in their credit contracts.”

The complaint’s claim of intentional targeting is premised on the allegation that “a significant majority” of the dealerships’ customers were African Americans. To support the claim, the complaint alleges that the individual defendant, who operated the dealerships, used racial slurs to refer to African Americans, made statements that African American customers were more likely to accept the installment sale contracts offered by the dealerships because they had fewer credit options, and indicated he had employed a particular sales agent who was “especially adept at getting African Americans to buy cars.”

The individual defendant was alleged to determine the credit terms offered by the dealerships and approve repossessions. The complaint also includes what appears to be a fallback claim that the defendants’ conduct constituted a “pattern or practice” of discrimination in violation of the ECOA.

In addition to the defendants’ alleged discriminatory conduct, the North Carolina UDTPA claims are based on allegations that the defendants:

  • Repossessed cars of customers who were not in default
  • Failed to provide customers with an authenticated notification of disposition before selling a repossessed car or refund resale amounts in excess of their account balances as required by North Carolina law
  • Used global positioning system devices to locate and repossess cars without informing customers such devices had been installed
  • Improperly seized customers’ personal property in repossessed cars

Interestingly, the case is pled as a disparate treatment case with disparate impact claims merely lurking in the background. In that regard, it appears to be another example of a DOJ trend to take what would otherwise be a disparate impact case based on the racial composition of the creditor’s customers and frame it as a disparate treatment case based on allegations of intentional misconduct.

The DOJ continues to use this approach so as not to rely exclusively on a disparate impact theory of liability, even though the U.S. Supreme Court has yet to issue a decision calling into question the continued viability of disparate impact ECOA claims. (Hopes for such a decision this term were dashed when a settlement in Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc., the case that raised the question of whether disparate impact claims are available under the Fair Housing Act, resulted in the Supreme Court’s dismissal of the case.)

In March 2013, the Consumer Financial Protection Bureau issued auto fair lending guidance that addressed dealer markups. While the CFPB does not have enforcement authority over auto dealers, its focus on indirect auto financing is likely to generate increased referrals to the DOJ of alleged fair lending violations by auto dealers.

To help consumer credit providers prepare for examinations and to prevent, manage, and defend against the increasing number of fair lending challenges, Ballard Spahr has created a Fair Lending Task Force. The task force brings together regulatory attorneys who deal with fair lending law compliance (including the preparation of fair lending assessments in advance of CFPB examinations), litigators who defend against claims of fair lending violations, and attorneys who understand the statistical analyses that underlie fair lending assessments and discrimination claims.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or, John L. Culhane, Jr., at 215.864.8535 or, Christopher J. Willis at 678.420.9436 or, or Heather S. Klein at 215.864.8732 or

Copyright © 2014 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.


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