Auto dealers have been receptive to new industry-generated pricing recommendations aimed at stamping out discrimination, but that is not enough to make the government step down its scrutiny.
In December, auto lender Ally Financial reached a $98 million settlement over allegations that it allowed dealers to charge minorities more for vehicle loans.
"There will probably be more actions like Ally in the coming year because [discretionary pricing] is an industry," said Jon Seward, deputy chief of housing and civil enforcement at the Justice Department. Speaking at a panel discussion at the National Community Reinvestment Coalition conference, he said few consumers are aware of the industry-wide practice. Car dealers have the discretion to raise the interest rate on auto loans that they arrange through lenders, which can inflate the profit on a sale by hundreds of dollars.
According to a 2011 study by the Center for Responsible Lending, the average dealer markup on a vehicle loan was about 2.5 percentage points -- or $714 in additional interest payments on an average 60-month loan. Advocacy groups have warned about disparities in the number of black and Latino borrowers who are charged higher interest rates. Consumer groups also say a large part of the pricing problem is a lack of transparency and suggest that dealers be required to disclose the rate rationale to all consumers.
Officials at the Justice Department and Consumer Financial Protection Bureau (CFPB) question whether markups lead to fair-lending violations. Dealers claim they often start out with a markup but reduce the rate in negotiation. The CFPB has suggested three alternative pricing models for compensating dealers without discrimination. Bankers could pay dealers a flat fee on each transaction, a fixed percentage of the loan, or a hybrid system that ties compensation to the amount of the loan and the duration of the contract.
Dealers complain the flat-fee model would eliminate competitive pricing and cost consumers more in the long run. As an alternative, the National Automobile Dealers Association has recommended that dealers establish a markup ceiling and document a legitimate reason for offering a discount below that threshold.