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Facts are Facts: Auto Dealer Interest Rate Markups Cost Consumers

May 6, 2015
Christopher Kukla
Auto Loans

A recent blog on the Washington Post site took Senator Elizabeth Warren to task for citing a statistic in a report from the Center for Responsible Lending (CRL). Our report quantified the amount that consumers pay in auto dealer markups. Auto dealers are paid large bonuses to raise the rate on auto loans above the rate that consumers qualify for. Auto loans are a big business--$955 billion in loans are currently outstanding, dealers provide 80% of these loans, and these bonuses can be more than $1,000 per loan. This adds up to a lot of money. The blog criticized our analysis, but on examination, its criticisms are flawed and invalid.

Errors and omissions in the story show the author did not understand the data and, in at least one instance, simply chose to ignore our explanations. What else to explain his critique that CRL did not update the 2009 data in our report? The blog gives the misimpression that we were not using the most recent data. As we told the author, after our reports appeared criticizing auto dealer markups, the industry data was no longer made publicly available. In addition, the industry has failed to publish any estimate of its own of the size of these markups. If the industry chooses to make more recent data on this practice public again, we will gladly update our analysis with the new data.

The blog is also filled with other key errors. The author concluded that since NAF objected to this data being used in this way in the first place, that undermines the whole project. NAF trade association members (subprime auto lenders) financially benefit from dealer markups. It is not surprising they would object to using their data to criticize a practice they benefit from. We believe it was appropriate to use their data in the way that we did.

Most troubling, in several places, the author conflates his lack of understanding of the data and our statistical analysis with it being faulty. The author stated that the numbers in our report did not match the dataset we used. We weighted the averages of the reported markups in the data by loan to value tiers, allowing us to control for risk, which then allowed us to extrapolate subprime data to the entire market. This weighting also has the indirect effect of controlling for the actual size of the reporting lenders, rather than just adding up the numbers, and we went through this process and the numbers with the author. This is standard statistical methodology to fairly represent the data and ensure that small outliers do not skew the findings. Rather than being a defect in the study, as the author claims, it most accurately presents the study data. In addition, he misunderstands the role of the auto dealer in the transaction, originally stating that they act as loan brokers (the author later deleted this from his post). In fact, they are the lender, and most importantly, they set the terms of the loans, including the interest rates and the markup.

The blog referenced and linked to an industry criticism of the CRL report and wrote that these lengthy comments raised serious questions about the research. Most of the author’s criticisms were, in fact, repeated from that industry piece. However, these industry comments, rather than evidencing problems with the study, merely reflect the auto dealers’ desire to maintain a hidden and unfair practice.

Lost in the blog, which summarily and dismissively references the well-documented abuses resulting from markups in auto loans, and in the ensuing debate, is the disservice to consumers. For African American and Latino buyers, these abuses are particularly acute.

Dealer markups are how much the interest rate charged on the loan is higher than the rate the borrower qualifies for. The dealer collects a bonus payment for the markup when the loan is sold to other companies, which is done with almost all auto dealer loans. The more the interest rate is raised, the bigger the payment is to the dealer. This practice is hidden from borrowers, and they are not told how much their interest rate is being raised or the amount of the extra payment. Not all borrowers are charged these markups, but tens of millions of consumers are charged them each year. African-American and Latino borrowers, studies show, are more likely to be charged markups and more likely to be charged larger markups. Auto consumers should receive the interest rates they qualify for and have earned. We applaud the efforts of the many, including Senator Warren, who advocate on behalf of those who have been victimized by these unfair and discriminatory practices that cost consumers enormous amounts of money each year.