Government regulators are launching efforts to prevent car dealers from jacking up the cost of financing to women and minorities. Dealers can mark up the interest rate on vehicle loans arranged through lenders, which can increase the profit on a sale by hundreds of dollars. Advocacy groups have been warning, however, of disparities in the number of black and Latino borrowers subjected to these higher fees; and they question whether the practice is tantamount to illegal, unfair lending.
The Justice Department's Steven Rosenbaum recently said that federal prosecutors are teaming up with the Consumer Financial Protection Bureau (CFPB) to look into possible discrimination in auto financing. Ally Financial disclosed in a recent regulatory filing that the CFPB had accused it of failing to prevent dealers from violating the Equal Credit Opportunity Act, which could result in fines or a settlement. The Center for Responsible Lending found in 2011 that the average dealer markup on a car loan was about 2.5 percentage points, which equals $714 in additional interest payments on an average five-year loan.
CFPB officials recently recommended three alternative pricing models to let dealers turn a profit without discriminating against certain consumers. Auto dealers could receive a flat fee on each transaction, receive a fixed percentage of the loan, or work with a hybrid system in which compensation is tied to the amount of the loan and the duration of the contract. While the CFPB cannot police car dealers, it does have jurisdiction over banks and other lenders that provide auto financing. Consumer advocates say lenders already calculate credit risk in the rates they provide dealers and that adding further costs only increases the odds of default.