Dealer Fees for Arranging Car Loans Are Drawing Scrutiny From U.S.

November 22, 2013
New York Times DealBook Blog  
auto financing news

For the 80 percent of consumers who need financing when purchasing a car, many U.S. dealers arrange loans via third-party lenders. Dealers decide how much they want to charge for that service and add the fee to the lender’s interest rate. Because dealerships do not have to disclose how much of the interest rate goes to them, many consumer advocates and regulators have raised concerns about discriminatory lending against minorities.In response, a number of government investigations into auto lending have been launched.

Auto-loan originations increased to $97.4 billion in the third quarter of this year, the highest level since the third quarter of 2007, according to the Federal Reserve Bank of New York. While the National Automobile Dealers Association says that franchise dealers typically do not charge more than 1 percent interest on average, some consumer groups insist that average fees are more like 2 percent to 2.5 percent, which can add hundreds of dollars over several years.

The Consumer Financial Protection Bureau (CFPB) has found that many African-American, Asian, and Hispanic borrowers often end up paying more than white borrowers with comparable credit. Dealers may also charge higher fees for borrowers with weaker credit, according to a 2011 study from the Center for Responsible Lending. This can also single out minorities because “borrowers of color are disproportionately represented in the subprime market,” pointed out Chris Kukla, senior vice president at the Center for Responsible Lending. Billions of dollars in fees on more than $700 billion in outstanding auto loans are at stake; the Justice Department is now looking into whether those fees violate fair-lending rules. 

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