The U.S. Department of Justice (DOJ) and the North Carolina Department of Justice recently requested court approval of a consent decree arising out of alleged racial discrimination by two North Carolina car dealerships in their auto finance practices. The U.S. Department of Justice called it the federal government’s first-ever discrimination settlement involving “buy here, pay here” auto financing.

Last month, the DOJ and the State of North Carolina filed suit in a North Carolina federal court, alleging that used-car dealerships Auto Fare, Inc., and Southeastern Auto Corp., as well as their owner, engaged in “reverse redlining” by intentionally targeting African American customers for alleged unfair and predatory credit practices in the financing of used car purchases. The complaint alleged that the defendants conducted no meaningful assessment of African American customers’ creditworthiness, and then entered into retail installment sale contracts with them that contained allegedly onerous terms, including vehicle sale prices higher than industry standard suggested retail prices, and required down payments and annual percentage rates that were disproportionately high compared with other subprime used-car dealers.

In addition, the complaint alleged that the dealerships’ default and repossession rates were disproportionately higher than those of other subprime used car dealers, and that the defendants engaged in various alleged unlawful practices related to repossessions. According to the complaint, these alleged practices constituted violations of the federal Equal Credit Opportunity Act (ECOA) and the North Carolina Unfair and Deceptive Trade Practices Act.

The settlement requires the defendants to establish a $225,000 settlement fund to compensate the alleged victims. It also requires the dealerships to implement various practices, including:

  • Requiring documentation procedures to ensure applicants have sufficient income to meet payment requirements
  • Limiting projected monthly payments to no more than 25 percent of the retail buyer’s income
  • Requiring policies and procedures for maintaining customer account files
  • Requiring finance charge rates to be at least five percentage points below the state’s rate ceiling
  • Mandating a lower finance charge rate for buyers who have specific evidence of lower credit risk
  • Requiring competitive sales prices for automobiles
  • Prohibiting certain fees at time of sale
  • Requiring the prominent display of anti-discrimination notices
  • Requiring equal credit opportunity training for employees
  • Prohibiting repossessions until at least two consecutive missed payments
  • Providing down payment refunds to buyers who promptly default under their retail installment sale contracts
  • Requiring strict compliance with provisions of state repossession law
  • Providing buyers with improved disclosures at the time of sale
  • Allowing buyers to obtain an independent inspection of the car before completing the purchase
  • Providing buyers with improved notices and other protections concerning repossession

Notably, some of the prospective relief pertains to vehicle sales (as opposed to alleged credit discrimination). It is unclear whether the relief relating to vehicle sales arose from the alleged violations of the North Carolina Unfair and Deceptive Trade Practices Act, or instead suggests a belief by the DOJ that the ECOA covers issues relating to vehicle sales when the transaction is a credit sale.

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.

If you have questions, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or, Joel E. Tasca at 215.864.8188 or, or Christopher J. Willis at 678.420.9436 or

Copyright © 2015 by Ballard Spahr LLP.
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