Congress: Don’t enable discrimination in auto lending

In 2013, to help address discrimination in the auto loan market, the Consumer Financial Protection Bureau issued guidance recommending steps for auto finance companies to take to ensure that they are operating in compliance with fair lending laws. The Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, or age. Auto finance companies that make their loans available through auto dealers have been found to have violated the ECOA by allowing dealers to increase the loan rates of borrowers of color more than for white borrowers for reasons unrelated to creditworthiness.

But a resolution has been filed in the Senate to use the Congressional Review Act to undo that guidance. That would be a huge mistake and would put Congress on the side of those who charge more for loans on the basis of race.

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For more than two decades, there has been clear evidence that discretionary dealer mark-ups result in African-Americans and Latinos paying extra -- that is, paying interest and fees higher than are justified by the evidence of their creditworthiness, and higher than the price charged to similarly situated white borrowers. The auto finance lenders that actually make the loans and control the terms on which the dealers offer them may violate the ECOA if they facilitate such disparate impacts by giving the lenders the unfettered discretion to mark up the interest rates charged to different borrowers.

We at the National Consumer Law Center proved this conclusion in courts of law using data from millions of loans. In the late 1990s, we co-counseled class action lawsuits against all of the major auto finance companies challenging the use of discretionary dealer markups. In discovery, we obtained data on individual loans, and we hired an expert witness to match the loans to drivers' license data in states that collected the drivers' race. With millions of loans to analyze, we also could find the race of many borrowers who financed a car in a state that does not collect racial information but previously lived in a state that does.

The results were overwhelming: Dealers were twice as likely to add a markup to the loans of African-Americans than to loans taken out by comparable white borrowers. Furthermore, when the rates of African-American and compatible white borrowers were both marked up, the African-American borrowers paid significantly more.

For example, in Wisconsin, black Ford Motor Credit Company borrowers paid an average $1,041 markup, whereas white buyers paid $156. In Alabama, black General Motors Acceptance Corporation borrowers paid markups that averaged $836, but the markup for white buyers was only $276.

We found statistically significant racial disparities in every state with sufficient data and in every region of the country. We also observed disparities for Hispanics on a national level, but Hispanic origin was not coded on enough loans to analyze state by state.

This powerful evidence convinced the courts that "the plaintiffs have proved their case": Permitting discretionary markups led to unacceptable racially disparate impacts. All of the auto finance companies settled with us, paid millions in compensation, and agreed to limit discretionary auto dealer markups for five years or more.

Unfortunately, these agreements all expired by 2012. Freed from the constraints, under pressure from dealers who play one finance company off of another, the financers have nearly all returned to the same practices that led to our lawsuit.

In the past several years, the Consumer Bureau and Department of Justice both concluded that several auto financers' policy of giving dealers discretion to mark up the interest rate of auto financing resulted in discrimination against minority borrowers. In enforcement actions against Ally Bank, American Honda Finance Co., Fifth Third Bank, and Toyota Motor Credit, the agencies found that borrowers of color paid higher interest rates than white borrowers with similar creditworthiness.

The Consumer Bureau’s guidance helps lenders comply with the ECOA and avoid charges of discrimination. The Bureau has urged all auto financers to move to a method of compensating auto dealers that does not result in disparate impacts on minority borrowers.

Now, some in Congress are calling for the repeal of the auto loan guidance. Congress should be standing with Americans subjected to the injustice of discrimination, not interfering with efforts to enforce fair lending laws.

Stuart Rossman is a staff attorney at the National Consumer Law Center and serves as the Center’s director of litigation.