The Consumer Financial Protection Bureau on Thursday told auto lenders that they would be held responsible for “unlawful, discriminatory pricing” by auto dealers that costs minority customers millions of dollars a year in higher interest rates.
“Consumers should not have to pay more for a car loan simply based on their race,” said the agency's director, Richard Cordray, in a statement.
It works like this: A potential car buyer finances the vehicle through the dealership. The dealer sells the loan to what’s known as an indirect auto lender, which can be a bank, credit union or finance company.
Before the dealer’s finance department sets the price of the loan, it contacts the lender to see what interest rate they’ll accept. Some lenders allow the dealer to increase that rate and keep some or all of that extra revenue.
“There’s no way to know if the loan is marked up or by how much,” said Chris Kukla, senior vice president at the Center for Responsible Lending. “Past lawsuits have shown that borrowers of color were more likely to pay a markup. And when they did, they paid more than similarly-situated white borrowers.”
The NAACP is pleased that the consumer agency is tackling the issue.
“Those who have the least to lose are losing the most with these types of nefarious practices,” said Dedrick Asante-Muhammad, the NAACP’s senior director of economic programs.
The National Automobile Dealers Association and the National Association of Minority Automobile Dealers said they strongly oppose any form of discrimination, but they cautioned that a change in the way dealers are compensated could drive up the cost of credit.
“The dealer-assisted financing model (indirect auto lending) has been enormously successful in both increasing access to, and reducing the cost of, credit for millions of Americans. Consumers overwhelmingly choose optional dealer-assisted financing because it’s convenient and competitive,” they said in a statement.
Consumer advocates call this markup disparity a “widespread practice” that they’ve been trying to stop since the mid-1990s. The National Consumer Law Center (NCLC) sued various lenders about this practice.
“In our lawsuits, we were able to show that the loans for African Americans and Hispanics were marked up more often than whites and the mark-ups were higher than whites, even though they had equal credit scores,” said NCLC attorney John Van Alyst.
For example, the NCLC found that black car buyers in the Northeast who financed through a dealership with one of the major auto company lenders paid an average dealer markup of $451. That compares with just $183 for white customers with similar credit histories. (Read the full report: Racial Disparities in Auto Lending)
The CFPB told indirect auto lenders to make sure fair lending laws are being followed, by paying a flat fee per transaction and eliminating dealer discretion to markup prices.
Consumer groups agree that it’s time for the current system, with hidden fees that are randomly set, to go away.
“Buying a car is already one of the most challenging and complicated buying decisions consumers make, to further compound the purchase by discriminatory loan practices is deplorable,” said Jack Gillis, director of public affairs with the Consumer Federation of America and author of "The Car Book." “The tragedy is that many buyers probably don’t even know they are being discriminated against.”
Your best defense is to shop around for financing outside of the dealership, so you’ll know what’s fair inside their finance offices, Gillis advised.
FCPB tipsheet: Buying a Car? Here’s What You Need to Know
Consumer Reports: How to Get the Best Car Loan