In a letter sent today to Consumer Financial Protection Bureau Director Richard Cordray, a group of civil rights and economic justice organizations, including the Center for Responsible Lending, asked the Bureau to use its regulatory authority to curtail discretionary auto dealer interest rate markups. Court cases and enforcement actions over two decades have shown dealer markups result in racial discrimination. Borrowers of color see their loans marked up more often and by a greater percentage.
Most consumers have no idea the practice exists and that car dealers are adding extra interest onto the loan a finance company has approved. CRL data shows dealer markups will cost consumers who bought a car in 2009 $25.8 billion in extra interest. The organizations note that regulators could stipulate that dealers be compensated in ways that are not tied to the interest rate. Mortgage brokers were banned from using markups on home loans to increase their compensation in the Dodd-Frank financial reform.
- How auto dealer interest rate markups work: A bank approves a 5% interest rate loan for a consumer. The dealer adds 2%, offers the consumer a loan at 7% and pockets the difference. The consumer potentially ends up paying thousands of dollars more in interest.
The text of the letter is below:
October 31, 2014
The Honorable Richard Cordray, Director
Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20552
Re: Rulemaking addressing auto lending interest rate markups
Dear Director Cordray,
We, the undersigned organizations, are writing to strongly urge the Consumer Financial Protection Bureau (CFPB) to issue a regulation prohibiting lenders from providing compensation to dealers through interest rate markups.
We commend the CFPB's work to eliminate discriminatory lending practices, particularly in the auto lending market. Our organizations have continuously fought for equal credit opportunities for all Americans. Unlawful discriminatory practices have no place in our credit markets.
The Bureau's March, 2013 guidance on indirect auto lending was an important first step in this process. We were heartened that your agency, in conjunction with the Department of Justice, brought the first enforcement action against a lending institution for discrimination in their auto lending portfolio. While enforcement is an effective tool, and one that we hope the CFPB will continue to use, we believe that all players in the auto lending market should have to play by the same rules. To that end, we strongly urge the CFPB to issue a regulation prohibiting lenders through "dealer participation" or "dealer reserve," which allows dealers to add to the interest rate on car loans and keep some or all of the difference as compensation.
The consent order with Ally Bank is evidence that racial and ethnic disparities continue to exist in the auto lending markup due to interest rate markup. The consent order showed that African American, Latino and Asian/Pacific Islander borrowers paid between 20 and 30 basis points more for their loans than similarly-situated white borrowers. These disparities added between $200 and $300 of additional interest over the life of those consumers' loans. This is not the first time this practice has resulted in allegations of discrimination. In the mid-1990s, a series of lawsuits against some of the nation's largest auto lenders showed evidence of rampant discrimination against borrowers of color in auto lending transactions. Not only were borrowers of color more likely to have the interest rates on their loans increased by the dealer, but those borrowers were also sold higher interest rates than their similarly-situated white peers.
It is our experience that discretionary, non-risk based pricing in lending often leads to discriminatory results. This is often the result of practices that, while not discriminatory on their face, lead to discriminatory impact.
The Center for Responsible Lending estimates that for consumers who bought cars in 2009, dealer interest rate increases resulted in $25.8 billion in additional interest over the lives of their loans. Dealers should be compensated for the work they do in financing car purchases. That said, this compensation system has wide-ranging and significant costs to consumers, and underscores the importance of fairness in this market.
We know that dealers already receive compensation in other loan programs that is not tied to the interest rate, including flat fee compensation or compensation tied to loan performance or sales numbers. We believe that a compensation system that is based on factors other than the interest rate would significantly reduce the chance of discrimination and result in fairer treatment for all auto buying consumers, while still allowing dealers to be compensated for work completed.
We appreciate the Bureau's commitment to strongly enforce laws and regulations on discrimination in lending, and we look forward to continuing our work with your agency in the future.
Sincerely,
Deepak Bhargava, Center for Community Change
Mike Calhoun, Center for Responsible Lending
Henry A. J. Ramos, Insight Center for Community Economic Development
Brent Wilkes, League of United Latin American Citizens
Hilary O. Shelton, NAACP
Lisa Hasegawa, National Coalition for Asian Pacific American Community Development
Janet Murguía, National Council of La Raza
Marc Morial, National Urban League
Orson Aguilar, The Greenlining Institute
Wade Henderson, The Leadership Conference on Civil and Human Rights
Antonio Gonzalez, The William C. Velazquez Institute
For more information, or to arrange an interview with a CRL spokesperson on this issue, please contact Andrew High at Andrew.High@responsiblelending.org or 919-313-8533.
For more information, contact Andrew High at andrew.high@responsiblelending.org or 919-313-8533.