Scrapping CFPB auto lending rule would only lead to more discrimination
A group of senators is working to make it easier for automobile dealers to discriminate against consumers of color, setting them up to pay unfair additional fees on their loans.
Sen. Jerry Moran, R-Kan., and 20 of his Republican colleagues are seeking to override the Consumer Financial Protection Bureau’s longstanding indirect auto lending guidance using the Congressional Review Act.
Evidence of widespread racial discrimination in auto lending dates back to at least the mid-1990s, when a series of lawsuits were filed against the largest auto finance companies based on data showing that borrowers of color were twice as likely to have their loans marked up and paid twice as much as similarly situated white borrowers with similar credit ratings.
In 2013, under the previous CFPB leadership, the bureau and the Department of Justice concluded that auto financers' policy of giving dealers discretion to mark up the interest rate of auto financing resulted in discrimination against borrowers of color. That guidance, once announced, put auto lenders on clear notice that the Equal Credit Opportunity Act makes them liable for discriminatory pricing on auto loans they acquire from auto dealers. ECOA makes it illegal for a creditor to discriminate in any aspect of a credit transaction on the basis of race or other protected classes — including indirect auto lenders.
Discrimination in auto lending has long been prevalent, and a significant culprit is the discretionary dealer markup. Three-fourths of all consumers use a loan to purchase a car, and 80% of auto loans are financed through the auto dealer. The auto dealer may provide that financing directly or it may facilitate indirect financing by a third-party lender. In indirect auto financing, the dealer usually collects basic information regarding the applicant and uses an automated system to forward that information to several prospective indirect auto lenders. The indirect auto lender establishes a “buy rate” for the customer. The dealer can then add as much as 2-2.5% to the buy rate and keep some or all of the difference. These markups have been found to add over $25 billion to the total loan cost of auto loans made over the course of one year.
The CFPB’s own investigations found that borrowers who identified as African American, Latino and Asian/Pacific Islander paid between 20 and 36 basis points more for their loans than white borrowers, adding between $150 and $300 in additional interest over the life of those consumers’ loans. These discrepancies were not, the investigations showed, attributable to variations in borrowers’ credit profiles; they were, rather, the result of discretionary dealer markups.
Enforcement against auto lending discrimination has resulted in real benefits to wronged borrowers of color. As a result of its investigations, CFPB and DOJ took enforcement action against Ally Financial, Honda, Fifth Third Bank and Toyota, which resulted in restitution to wronged borrowers of over $140 million. These lenders also agreed to adjust their pricing models by limiting the amount of their dealer markups — real evidence of progress in the fight against a discriminatory lending practice.
Discrimination in auto lending continues to be a very real problem. In early 2018, a study conducted by the National Fair Housing Alliance paired white and nonwhite testers to visit auto dealerships and shop for the same car within 24 hours of each other. The study found that, more often than not, the better qualified nonwhite applicant was offered more expensive pricing options than the less qualified white applicant. This resulted in those nonwhite borrowers paying on average $2,662 more than white borrowers over the life of the loan. Additionally, NFHA found that 75% of the time, white testers were offered more financing options than nonwhite testers. These statistics further prove the need for continued vigilant enforcement against violations of ECOA, as well as clear expectations for industry like the 2013 guidance provides.
Auto loans are the third most prevalent form of debt among U.S. residents after home and student loans. Discrimination in auto lending contributes to credit access disparities and to the racial and ethnic wealth gap.
Overriding the CFPB guidance is a dangerous step backward and sends a message to the American people that it’s OK for auto dealers to give consumers a higher price tag for a car simply because of the color of one’s skin.
CRA resolutions — which bypass regular congressional procedure and require only a simple majority to pass — have never been used to undo longstanding guidance, and they were not intended to be used this way. The CRA was designed to permit Congress to override recent agency actions, not guidance issued over five years ago. Passing this CRA would open the door to regulatory uncertainty across the federal regulatory environment and across a range of U.S. markets as a result. Will Congress attempt to undo thousands of other regulatory guidance documents issued since the 1996 passage of the Congressional Review Act?
A car is often one of the biggest purchases made by a household. For many working families it is the only asset they own. The consumer bureau 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’s staff has made great progress in fighting against auto lending discrimination practices — their work and commitment to the agency’s mission shouldn’t be curtailed or retracted because of industry influence.
The Senate should reject this effort once it comes up for a vote and recommit itself to push policies that root out racial discrimination, not advance it.