Racial Discrimination in Auto Loans Probed by Two U.S. Agencies

The U.S. Consumer Financial Protection Bureau and the Department of Justice are probing a group of auto lenders for possible racial discrimination, a senior official said today.

“We have a number of ongoing joint investigations in the indirect auto-lending space,” Steven Rosenbaum, chief of the housing and civil enforcement section at the Justice Department said at a forum hosted by the CFPB in Washington.

Ally Financial Inc. said on Nov. 5 that the bureau has told the lender it failed to prevent auto dealers from using practices that violate the Equal Credit Opportunity Act, which the bureau and Justice Department jointly enforce. Other lenders have also been warned of possible lawsuits, according to people briefed on the matter.

Patrice Ficklin, CFPB’s assistant director for fair lending, said that the agency’s work has indicated a “significant risk of discriminatory pricing outcomes.”

The consumer bureau’s public initiative on discrimination in auto lending began in March, when it issued a formal letter of guidance on auto lending. It said that banks it supervises -- those with assets above $10 billion -- face lawsuits if they buy discriminatory loans made by dealers. Auto dealers were excluded from the bureau’s supervision in the 2010 Dodd-Frank Act that created the CFPB.

Ficklin said that the bureau’s supervision of banks has revealed “substantial and statistically significant differences” in interest rates on car loans paid by black, Hispanic and Asian borrowers when compared with costs paid by white customers.

Rate Disparities

“Numerous institutions” show disparities not explained by differences in credit quality of over 10 basis points, while others reach 20 or 30 basis points. “What we’ve already seen amounts to tens of millions of dollars in overpayment,” Ficklin said, and “the total could be much greater than that.”

The CFPB guidance takes aim at a practice the agency refers to as “dealer mark-up” and auto dealers call “dealer-assisted financing.” Under the system, banks function as indirect lenders, allowing dealers to add points to the interest rate and pocket the difference. The consumer bureau said that one way for lenders to comply with guidance would be to pay flat fees to dealers instead of varying interest rates.

Consumer groups, including the Durham, North Carolina-based Center for Responsible Lending, charge that the financing practice gives dealers an incentive to move buyers into more-expensive loans. Dealers say the mark-up is a standard practice in retail transactions and represents a reasonable price for their services, which include bringing in sales and handling paperwork.

Rosenbaum said that the collaboration between the two agencies has been “terrific and very constructive” since the bureau was created by the 2010 Dodd-Frank Act.

“And it’s not just in the auto-lending space, it’s in the other spaces where authority overlaps,” Rosenbaum aid.