Discrimination in Car Dealer Financing
By Charlene Crowell
A diverse group of civil rights leaders representing Blacks, Latinos and Asian-Pacific Islanders have joined forces to call for major changes in auto dealer compensation. Together, the organizations are calling for the Consumer Financial Protection Bureau (CFPB) to use its rule-making authority to stop dealer markups on auto interest rates that in 2009 cost consumers $25.8 billion in extra interest payments.
In an October 31 letter to Richard Cordray, CFPB Director, leaders of 11 organizations wrote, “It is our experience that discretionary, non-risk based pricing in lending often leads to discriminatory results. This is often the result of practices that, while not discriminatory on their face, lead to discriminatory impact.”
Participating organizations are: Center for Community Change, the Greenlining Institute, the Insight Center for Community Economic Development, the Leadership Conference on Civil and Human Rights, the League of United Latin American Citizens, NAACP, National Coalition for Asian Pacific American Community Development, National Council of LaRaza, National Urban League, the William C. Velasquez Institute and the Center for Responsible Lending (CRL).
When consumers buy and finance their vehicles at car dealerships, they open the door for dealers to earn additional compensation by raising the financial institution’s actual interest rate. Car dealers make the loans to buyers and then sell the financing to a bank or other institution that allows the interest rate markup. The practice known as “dealer reserve” or “dealer participation” has a long history of discriminatory impact.
To illustrate how dealer markup works, consider this example: Assume that a bank is willing to buy a loan from a dealer as long as the loan is for at least 5 percent interest. The bank then gives the dealer the discretion to add an additional 2 percent interest markup as compensation for the loan. Then the dealer will tell the consumer, “Good news! We got you a great rate – 7 percent!”
Meanwhile, the consumer has no idea that 2 percent of the interest goes to the dealer. The additional interest can add hundreds, if not thousands, of additional dollars of interest over the life of the loan.
“Dealer markup has a long history of discrimination and has caused consumer of colors to pay more for their car loans than they should,” said Chris Kukla, senior vice-president with the Center for Responsible Lending. “This also goes beyond consumers of color – because this is a hidden fee, any consumer could end up paying a higher interest rate than necessary. That’s why we are calling for this practice to end.”
In their letter, the organizations pointed to a related consent order against Ally Bank that determined Black, Latino and Asian-Pacific Islanders actually paid more for their loans than White borrowers with the same credit profile. Over the life of these auto loans, the disparities cost thousands of consumers an extra $200 to $300 per loan.
“This is not the first time this practice has resulted in allegations of discrimination,” wrote the advocates. “In the mid-1990s, a series of lawsuits against some of the nation’s largest auto lenders showed evidence of rampant discrimination against borrowers of color in auto lending transactions. Not only were borrows of color more likely to have the interest rates on their loans increased by the dealer; but those borrowers were also sold higher interest rates than their similarly-situated white peers.”
Currently, CFPB and the Department of Justice are investigating at least six other financial institutions making auto loans.
“Our organizations have continuously fought for equal credit opportunities for all Americans,” said the advocates. “Unlawful discriminatory practices have no place in our credit markets.”
Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.email@example.com.