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Auto Lending Anti-Discrimination Guidance Must Remain Intact

Friday, December 8, 2017
Delvin Davis

WASHINGTON, D.C. – A Government Accountability Office (GAO) letter released earlier this week in response to a Congressional inquiry threatens to undermine the Consumer Financial Protection Bureau’s (Consumer Bureau) 2013 indirect auto lending guidance. This important guidance is a key step to limit discriminatory impact of dealer interest rate markups in the auto lending industry. In the letter, the GAO concludes that the auto lending guidance is a Consumer Bureau “rule” and can be repealed through a Congressional Review Act (CRA).

The Center for Responsible Lending (CRL) has been a staunch supporter of the auto lending guidance since its release. Car dealer and lenders, and their allies in Congress, have consistently attacked the guidance despite clear evidence showing that, for decades, car dealer markups have led to discriminatory lending.

“More than two decades of data and research show discrimination in the auto lending market, which hits low-income families and communities of color,” said CRL Senior Researcher Delvin Davis. “A car is often one of the biggest purchases made by a household. The Consumer Bureau has found discriminatory pricing in the auto financing market and should have the ability to use the full range of its regulatory tools and authority to address it. The agency’s staff has made great progress in fighting against auto lending discrimination practices—their work and commitment to the Consumer Bureau’s mission shouldn’t be curtailed or retracted because of industry influence.”

Example of how auto dealer interest rate markups work: A bank informs a dealer that it approves a 5% interest rate loan for a consumer. The dealer adds 2%, offers the consumer a loan at 7%, and pockets much of the difference. The consumer potentially ends up paying thousands of dollars more in interest.

The auto lending guidance said that the Consumer Bureau found discrimination when comparing markups between white borrowers and borrowers of color. The Consumer Bureau also noted the lengthy past history of discrimination due to car dealer interest rate markups. In the mid-1990s, a series of lawsuits were filed against the largest auto finance companies in the country alleging that borrowers of color were more likely to have their loans marked up, and paid larger markups. 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 white borrowers with similar credit ratings.

Given historic and current data showing discrimination, the Consumer Bureau noted that lenders could eliminate fair lending risk by paying compensation to dealers in ways other than allowing them to manipulate the interest rate. If, however, lenders chose to continue allowing dealers to increase the interest rate for compensation, then the lender would need to take steps to ensure there is no discrimination.

The Consumer Bureau’s enforcement actions in conjunction with the Department of Justice over the past two years have resulted in more than $218 million in fines and restitution to consumers who paid more in interest than they should have due to discriminatory dealer mark-ups.

For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact ricardo.quinto@responsiblelending.org.