With new car prices meeting or surpassing many consumers’ incomes, the vast majority of people finance their car purchases. On an annual basis, according to the Center for Responsible Lending, more than 79 percent of auto loans occur through third-party indirect lenders that partner with dealerships.
After most automobile purchases, many consumers wonder whether the deal they signed was a fair one. Black consumers too often get a raw deal rather than a fair one because Black borrowers and other consumers of color pay more for their auto loans than do similarly-situated White borrowers.
Last Thursday, the Consumer Financial Protection Bureau (CFPB) took its traveling field hearings to Indianapolis, the Hoosier heartland’s capital. At the forum, Richard Cordray, CFPB Director, announced the Bureau’s proposed expansion of its supervision of auto finance to now include larger and non-bank entities. CFPB could then better ensure full and fair legal compliance among 38 auto finance companies that together originate nearly 90 percent of all non-bank auto loans and leases. In early 2014, American consumers had more than 87 million auto loans valued at nearly $900 billion, according to CFPB.
“Non-bank auto finance companies extend hundreds of billions of dollars in credit to American consumers, yet they have never been supervised at the federal level,” said Cordray. “We took action after we uncovered auto lending discrimination at banks we supervise.”
For the Center for Responsible Lending (CRL), the field hearing was also a chance to underscore key research findings and again raise specific consumer concerns.
Chris Kukla, CRL’s senior counsel for government affairs told the gathering, “The recent rise in auto lending, particularly in the subprime space, has attracted significant and ongoing attention in the media. Many of these [news] articles have focused on abuses that occur. Unfortunately, most of these abuses are not new – they have existed for some time.”
CFPB, the cornerstone of the Dodd-Frank Financial Reform Act, is empowered to monitor and enforce consumer laws. In auto lending, CFPB shares its jurisdiction with other regulators.
Further, just as HUD oversees the Fair Housing Act, communities of color are legally protected from discriminatory practices through the Equal Credit Opportunity Act (ECOA). ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transactions including race, color, religion, national origin, gender, marital status or age.
Even with these laws and other designed to eliminate discriminatory practices, racial discrimination still occurs. Research from as early as 2006 found that discriminatory auto lending pricing was evident. A series of class-action lawsuits challenged how Blacks and Latinos disproportionately received interest rate markups more frequently and to a greater degree than their similarly-situated White counterparts. In fact, Black and Latinos received higher rates even though they were reportedly more likely than Whites to negotiate their loan.
Earlier this year, CRL research analyzed dealer interest rate mark-ups, sometimes called “dealer reserves” or “dealer participation”, the practice of car dealers adding extra interest to the car loan a finance company approves.
For example, a bank may approve a consumer for a loan with a 5 percent interest rate; but the dealer offers the consumer a loan at 7 percent and pockets the difference. Lenders bidding to buy the auto loan contract allow the dealers to increase the interest rate for extra dealer compensation. This widespread practice raises interest rates above those charged by financial institutions. And it disproportionately harms communities of color.
For consumers, these mark-ups can range as high as 5 percent in additional interest costs. Misleading sales information and unnecessary add-on products each contributed to higher financing costs, again particularly for consumers of color.
Worst of all, consumers at the heart of these financial transactions are often unaware of the relationship or allowances between third-party lenders and dealers.
Kukla’s comments also noted that in auto lending, very few or weak consumer protections exist at either the federal or state levels.
“The current market requires safeguards to ensure that the market is robust and sustainable,” said Kukla. “Abusive lending practices have no place in our credit markets.”