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Consumer Group Puts Banks On Notice For Race-Based Car Loans

By Aaron Crowe

Auto dealers that charge minorities higher interest rates on car loans must stop the discriminatory practice or the banks backing the loans will be sued for unfair lending, a federal watchdog agency announced Thursday.

For consumers seeking auto loans through their car dealer, future loans could either be more expensive or cheaper, depending on who you believe. Loans could get cheaper if dealers aren’t rewarded by banks to push more expensive loans, as the Consumer Financial Protection Bureau is seeking. The National Auto Dealers Association, however, says the CFPB’s approach will make auto loans less competitive.

The CFPB pointed out research that black and Latino borrowers are more likely to pay higher interest rates than white borrowers, even if they have the same credit risk.

“Consumers should not have to pay more for a car loan simply based on their race,” CFPB Director Richard Cordray said in a statement, adding that its announcement “clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”

The National Consumer Law Center found in a 2010 study that while Hispanics were discriminated against on auto loans across the country, African-American customers were race-coded in auto loan documents in every state. In all 50 states, blacks paid 270% more when buying a car through a GMAC loan than whites did.

Here’s how the auto loans work, according to the CFPB: When buying a car, consumers may receive financing from an auto dealership instead of directly from a financial institution a practice called “indirect auto lending.”

The dealer often facilitates indirect financing through a third party lender, such as a bank or credit union, and the lender provides the dealer an interest rate.

Often, the lenders allow the dealer to charge the consumer a higher interest rate than the rate the lender gave the dealer. Called a “dealer markup,” part of the revenue from that higher interest rate is shared by the lender and the dealer.

According to the CFPB, auto dealers have discretion to charge consumers different rates regardless of their creditworthiness. This increases the risk of pricing disparities based on race, national origin and other factors, with blacks and Hispanics being charged higher markups, the agency says.

The CFPB doesn’t have authority to regulate car dealers, so it is targeting banks that fund the loans the car dealers sell. The agency warned banks that they could be sued for violating fair lending laws if they have policies that encourage discriminatory practices.

To fight it, the CFPB recommended that banks train auto dealers in how not to discriminate, and change how they pay dealers to a flat fee per loan, regardless of the interest rate.

Changing how dealers are compensated for loans could increase loan rates for buyers and the CFPB’s recommendations “will only weaken the consumer’s ability to secure financing at the lowest possible cost,” the National Automobile Dealers Association, NADA, and the National Association of Minority Automobile Dealers, NAMAD, said in a joint statement.

“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,” the auto dealers said. “Consumers overwhelmingly choose optional dealer-assisted financing because it’s convenient and competitive.”


Aaron Crowe is a journalist who covers the auto industry for CheapCarInsurance.net.