Campaign to Rollback Consumer Protection in Auto Financing
By Charlene Crowell
When it comes to public policy, most citizens tend to think in terms of what government can accomplish on their behalf. Multiple civil rights laws and the Americans with Disabilities Act are but a few such examples. There is also another side to public policy reforms: attempts to rollback or take away regulations that are often favored by industry and championed on Capitol Hill by paid lobbyists.
Just last week, a U.S. House committee moved a bill that will stop the Consumer Financial Protection Bureau (CFPB) from taking action against discriminatory practices in auto lending. This legislative development is an example of how Washington often responds to industry and its lobbyists.
The proposed rollback in consumer protection in auto financing has the support of more than 170 Members of Congress, including a number of Democrats. H.R. 1737, co-sponsored by House Members Frank Guinta (R-N.H.) and Ed Perlmutter (D-Colorado), recently passed in the House Financial Services Committee.
So what does this legislation do?
H.R. 1737 would require the CFPB to drop guidance it issued in 2013 that called for auto lenders to comply with anti-discrimination laws. The bill would also require the Bureau to gather public comment before issuing any other guidance related to auto lending. Supporters say it is simply about proper process.
No – it is not. The bill would condone discrimination in auto lending. All of its supporters should be ashamed.
The 2013 CFPB guidance took direct aim at a specific practice in auto lending. Auto dealers get bonuses from lenders for selling consumers a higher interest rate than that for which they qualify. These bonuses add up to billions of dollars in added dealer compensation. On top of these lucrative deals, this practice is completely hidden from consumers.
Research by the Center for Responsible Lending (CRL) found that consumers who took out loans in 2009 paid $25.8 billion in more interest over the lives of their loans – all because of dealer interest rate markups.
For the past two decades, this lending practice has resulted in a series of lawsuits and more recent enforcement actions that all alleged discrimination resulting from this practice. The data from these lawsuits and related enforcement actions consistently show that borrowers of color pay higher interest rates than White borrowers, solely because of this dealer kickback.
Recent CFPB enforcement actions total more than $176 million in fines and restitution to consumers. By utilizing the Equal Credit Opportunity Act (ECOA), CFPB has taken steps that no regulator to date has taken to end discrimination in auto lending.
Fortunately, just as a coalition of interests pushed for and won passage of reforms that created CFPB, several consumer and civil rights groups are now simultaneously pursuing preservation of the Bureau’s pro-consumer actions. A late July letter sent to the entire 435-member House of Representatives on behalf of the NAACP, the National Council of La Raza. Americans for Financial Reform, the Center for Responsible Lending (CRL) and other organizations, reminded lawmakers of the history and scale of discriminatory auto lending finance.
“This is one of the last areas in consumer lending where an individual sitting across the desk from a consumer makes a decision about how much to charge that particular consumer for financing above and beyond the financing costs dictated by their credit worthiness. Intentionally or not, this often leads to people of color paying more than their fair share,” wrote the advocates.
“In the mid-1990s, a series of lawsuits was filed against the largest auto finance companies in the country alleging that borrowers of color were most likely to have their loans marked up and paid larger markups,” continued the advocates, “The data used in those lawsuits indicated that borrowers of color were twice as likely to have their loans marked up, and paid markups twice as large as similarly situated whites borrowers with similar credit ratings.”
It is doubtful that the consumers who received restitution for faulty financing of vehicles through Ally Financial and Ally Bank, American Honda Financial and Evergreen Bank would support a regulatory rollback, either. From their perspective, monies the industry returned to consumers are financial justice.
“Consumer protections in auto lending have been non-existent until the CFPB came on the scene,” said Chris Kukla, CRL senior vice president. “Auto dealers and their allies in Congress are now trying to stop the CFPB from enforcing anti-discrimination laws. Dealer interest rate markups are unfair and discriminatory, and should be prohibited entirely. With the record of discrimination tied to this practice, Congress should be thanking the CFPB for acting instead of getting in the way.”
Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.firstname.lastname@example.org.