Auto loans are the third largest source of outstanding household debt after mortgages and student loans. Those loans should be administered fairly without discriminatory practices.
The Consumer Financial Protection Bureau (CFPB) recently gave notice to lenders that offer auto loans through dealerships that they are responsible for any unlawful or discriminatory pricing. The CFPB reported that discriminatory markups in auto lending may result in tens of millions of dollars in consumer harm each year.
When consumers finance automobile purchases from an auto dealership, the dealer often coordinates the indirect financing of a loan through a third party lender. In this position, the dealer is given an interest rate that the lender will accept for a given consumer; however, the indirect auto lenders frequently permit the dealer to charge the consumer an interest rate that is higher and thus more costly than the rate provided by the lender. Typically this practice is called the “dealer markup,” and the lender kicks back to the dealer some of the money from the increased interest rate.
As one would expect. these markups create a compensation opportunity for dealers and allows them the discretion to charge consumers different rates regardless of consumer creditworthiness. Lender policies that provide dealers with this type of discretion increase the risk of pricing disparities among consumers based on race, national origin, and potentially other prohibited classifications. The CFPB says that research shows that markup practices may lead to African Americans and Hispanics being charged higher markups than white consumers in similar situations.
“Consumers should not have to pay more for a car loan simply based on their race,” said CFPB Director Richard Cordray. “Today’s bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”
The CFPB's announcement explained how the Equal Credit Opportunity Act (ECOA) applies to indirect auto lending. Under the ECOA, it is illegal for a creditor to discriminate in any aspect of a credit transaction on prohibited bases including race, color, religion, national origin, sex, marital status, and age. To ensure that such practices are stopped the CFPB will oversee and encourage indirect lenders to: (i) impose controls on dealer markup and markup policies; (ii) monitor and address the effects of markup policies as part of a robust fair lending compliance program; and (iii) eliminate dealers' discretion to markup consumer interest rates.