House Joins Senate in Voting to Allow Auto Loan Markups with Extreme Racial Disparities To Continue
WASHINGTON, D.C. – Moments ago, the U.S. House of Representatives voted to repeal guidance from the Consumer Financial Protection Bureau (CFPB) that protects consumers from discriminatory auto lending practices. Hard data shows enormous racial disparities in auto loan markups throughout the country.
“They may try to dress it up with political spin but today Congress endorsed discrimination. The CFPB made it clear to the auto industry that it was a violation of the law to charge people of color with the same credit as whites higher interest rates on their loans. The House disagrees. Simply put, this is a big win for bigots,” said Karl Frisch, executive director of the consumer watchdog organization Allied Progress.
He continued, “Many auto dealers are actively discriminating against people of color. This behavior is pervasive and the CFPB’s guidance would help to end it. Unfortunately, the auto industry has showered Congress with millions in campaign cash putting them in the driver’s seat and it’s people of color who are being taken for a ride.”
The following are excerpts from a letter opposing repeal of the CFPB’s auto lending discrimination guidance that was sent to leaders in Congress by Allied Progress and a coalition of dozens of consumer advocacy organizations and civil rights groups including NAACP, Americans for Financial Reform, The Leadership Conference on Civil and Human Rights, and Center for Responsible Lending, among others:
This resolution is the latest in a series of attempts to chill federal efforts to end widespread unlawful discrimination. Discrimination in the auto lending market is well-documented and results in people of color paying more for years to finance a car purchase. This CRA would also set the dangerous precedent of undoing long-standing federal agency guidance—an expansion of the use of the Congressional Review Act, and certainly beyond its original purpose of narrowly reviewing regulations soon after they were enacted.
The Consumer Bureau’s 2013 indirect auto lending guidance put auto lenders on clear notice that the Equal Credit Opportunity Act (ECOA) makes them liable for discriminatory pricing on auto loans they acquire from auto dealers. ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction on the basis of race or other protected bases; indirect auto lenders are creditors under ECOA.
Discrimination in auto lending has long been widespread, and a significant culprit is the discretionary dealer mark-up. Three-fourths of all consumers use a loan to purchase a car, and 80% of auto loans are financed through the auto dealer. The auto dealer may provide that financing directly or it may facilitate indirect financing by an indirect third-party lender. In indirect auto financing, the dealer usually collects basic information regarding the applicant and uses an automated system to forward that information to several prospective indirect auto lenders. The indirect auto lender establishes a “buy rate” for the customer. The dealer can then add as much as 2-2.5% to the buy rate and keep some or all of the difference. These mark-ups have been found to add over $25 billion to the total loan cost of auto loans made over the course of one year.
The discriminatory impact of this discretionary practice has been researched and documented, time and again. In the mid-1990s, a series of lawsuits were filed against the largest auto finance companies based on data showing that 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. The CFPB’s own investigations found that borrowers who identified as African American, Latino, and Asian/Pacific Islander paid between 20 and 36 basis points more for their loans than similarly situated white borrowers, adding between $150 and $300 in additional interest over the life of those consumers’ loans.
We have seen the evidence that enforcement against auto lending discrimination has resulted in real benefits to wronged borrowers of color. As a result of its investigations, the Consumer Bureau, jointly with the Department of Justice, took enforcement action against Ally Financial, Honda, Fifth Third Bank, and Toyota, which resulted in restitution to wronged borrowers of over $140 million. These lenders also agreed to adjust their pricing models by limiting the amount of their dealer mark-ups–real evidence of progress in the fight against a discriminatory lending practice. Of note, the 2013 guidance also explains that lenders can address fair lending risk by paying compensation to dealers in ways other than allowing them to mark up the interest rate.
Discrimination in auto lending continues to be a very real problem. In early 2018, a study conducted by the National Fair Housing Alliance (NFHA) paired white and non-white testers to visit auto dealerships and shop for the same car within 24 hours of each other. The study found that, more often than not, the better qualified non-white applicant was offered higher cost pricing options than the less qualified white applicant, resulting in those non-white borrowers paying on average $2,662 more than the white borrowers over the life of the loan.1 Additionally, NFHA found that 75% of the time, white testers were offered more financing options than non-white testers. These statistics further prove the need for continued vigilant enforcement against violations of ECOA, as well as clear expectations for industry like the 2013 guidance provides.
Auto loans are the third most prevalent form of debt among U.S. residents after home and student loans. Discrimination in auto lending contributes to credit access disparities and to the racial and ethnic wealth gap. This CRA would send the wrong message to the auto industry and to the American people.
In addition, CRA has never been used to undo longstanding guidance, and it was not intended to be used this way. Permitting CRAs to undo longstanding guidance opens the door to regulatory uncertainty across the federal regulatory environment and across a range of U.S. markets as a result.
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