WASHINGTON, D.C. – U.S. Senator Jerry Moran (R-Kan.) has introduced a Congressional Review Act (CRA) resolution, S.J. Res 57, which would undo the Consumer Financial Protection Bureau’s (CFPB) 2013 indirect auto lending guidance. This important guidance is a key step to limit discriminatory impact of dealer interest rate markups in the auto lending industry. The resolution has 15 Republican cosponsors.
The announcement to eliminate this important consumer protection comes off the heels of a recent investigative report released by the National Fair Housing Alliance (NFHA) detailing the ongoing racially discriminatory practices that exist in the auto lending market. In their findings, NFHA uncovered that more than half the time white borrowers with weaker credit profiles received less expensive financing options and more favorable treatment than their non-white counterparts who were more financially qualified.
“It’s disheartening that the industry and their allies in Congress are pushing to undermine protections against auto lending discrimination,” said Rebecca Borné, Senior Policy Counsel at the Center for Responsible Lending (CRL). “Years of data make clear that racially discriminatory treatment of consumers is a significant problem in the auto lending industry. This discrimination is especially felt by low-income families of color, where a car is often one of the biggest purchases made by a household. The CFPB has found discriminatory pricing in the auto financing market and should have the ability to use the full range of its regulatory tools and authority to address it. The agency staff’s work and commitment to the consumer bureau’s mission shouldn’t be curtailed or retracted because of industry influence.”
The CFPB’s enforcement actions in conjunction with the Department of Justice over the past few years have resulted in more than $218 million in fines and restitution to consumers who paid more in interest than they should have due to discriminatory dealer mark-ups. Car dealer and lenders, and their allies in Congress, have consistently attacked the auto lending guidance despite clear evidence showing that, for decades, car dealer markups have led to discriminatory lending.
Example of how auto dealer interest rate markups work: A bank informs a dealer that it approves a 5% interest rate loan for a consumer. The dealer adds 2%, offers the consumer a loan at 7%, and pockets much of the difference. The consumer potentially ends up paying thousands of dollars more in interest.
The auto lending guidance said that the consumer bureau found discrimination when comparing markups between white borrowers and borrowers of color. The CFPB also noted the lengthy past history of discrimination due to car dealer interest rate markups. In the mid-1990s, a series of lawsuits were filed against the largest auto finance companies in the country alleging that borrowers of color were more likely to have their loans marked up, and paid larger markups. The data used in those lawsuits indicated that borrowers of color were twice as likely to have their loans marked up, and paid markups twice as large as similarly situated white borrowers with similar credit ratings.
Given historic and current data showing discrimination, the consumer bureau’s guidance provides that lenders can eliminate fair lending risk by paying compensation to dealers in ways other than allowing them to manipulate the interest rate. If, however, lenders choose to continue allowing dealers to increase the interest rate for compensation, then the lender needs to take steps to ensure there is no discrimination.