Oppose Auto Dealer Carve-Out from Consumer Protection
Recipient: U.S. Senate
Dear Senator:
The undersigned civil rights organizations strongly urge you to keep auto dealers within the jurisdiction of the Consumer Financial Protection Bureau (CFPB), as proposed in the “Restoring American Financial Stability Act of 2010” (S. 3217). It is vital to the communities we represent that the CFPB is able to enforce all consumer protection and civil rights laws against predatory or discriminatory dealers and financiers. We urge you to oppose the Brownback amendment to carve them out.
Dealers, whether arranging financing or providing financing themselves, all too often engage in discrimination against minorities. Dealers are typically the loan broker and the originator, and also the entity with both discretion and first-hand exposure to the car buyer. This often results in dealers’ arranging financing that discriminates against classes of car buyers:
- Detailed research by academics earlier this decade on millions of auto loans revealed that auto dealers were far more likely to mark up the loan rates of minorities. Class action litigation has revealed discrimination at GM, Toyota, and Ford dealerships, among others. As a result, courts have ordered most major car finance companies to cap rates and provide funds for minority-related consumer education, although these orders expire soon.
- Just two months ago, the Department of Justice brought an action alleging that Nara Bank and two car dealers charged non-Asian-American customers higher interest rate markups. Unfortunately, this is the only such case brought in many years by either the DOJ or the FTC, the two entities charged with enforcing the Equal Credit Opportunity Act. Given the widespread nature of the problem revealed in the academic studies and private litigation, the current structure has failed to effectively police auto finance.
- Analyses have shown that Latinos pay higher used car loan rates than other borrowers, African-American women pay more than African-American men, and both pay more than whites.
Dealers are deeply engaged in auto finance. In fact, the major source of dealer profits comes not from the sale of the car itself, but rather from their “Finance and Insurance” (F & I) departments, which arrange auto financing to maximize dealer profit in the auto financing and add-ons. One common profit center for dealers in these transactions is “dealer markups.” A dealer markup involves the dealer arranging financing at terms worse than what the consumer qualifies for. A car buyer, whose credit history would entitle the consumer to an 8 percent loan, will be put in a 10.5 percent loan by the dealer, and the dealer and the lender will split the extra profits. It is estimated that dealer markups cost consumers $20 billion per year in unnecessary finance expense.
While markups are bad for all consumers, they are especially unfair to minority car buyers. As academic studies and class action litigation have shown, minority car buyers pay significantly higher dealer markups than non-minority car buyers with the same credit scores. In addition, whistleblowers and former F & I managers have stated that people of color have been deliberately targeted by dealers for discriminatory treatment.
Unfortunately, individual buyers don’t often know when discrimination has occurred. While “yield spread premiums,” a practice in the mortgage industry similar in many ways to dealer markups, are evident upon the face of the mortgage documents to those with the experience and time to understand them, consumers who have been the victim of dealer markups have no way of knowing that they are paying more for credit than the lender says they need to.
Dealer markups are not the only finance-related activity that gives the dealers both the discretion and incentive to engage in discriminatory pricing. When arranging financing, dealers often include overpriced add-ons in a practice known as “loan packing.” Because dealers are selling both the car and the financing, consumers are not likely to understand the pricing of these add-ons. In fact, the pricing is largely within the dealers’ discretion. Although incredibly difficult to prove under the current regulations, this dealer discretion likely results in higher costs for minorities, just as in the example of dealer markups.
In order to bring transparency and fairness to these transactions, and effectively police the market, the CFPB must have jurisdiction over dealers when they engage in financing-related activities. As such, we strongly urge you to oppose the Brownback amendment to carve out auto dealers from the Bureau’s jurisdiction.
Thank you for your consideration. Should you or your staff have any questions, please contact Rob Randhava, Senior Counsel with The Leadership Conference, at (202) 466-6058, or Graciela Aponte, Legislative Analyst with National Council of La Raza, at (202) 776-1578.
Sincerely,
A. Philip Randolph Institute
American-Arab Anti-Discrimination Committee
Americans for Democratic Action, Inc.
Asian American Justice Center
Center for Responsible Lending
Common Cause
Community Action Partnership
Demos
Empire Justice Center
Japanese American Citizens League
Lawyers’ Committee for Civil Rights Under Law
Legal Aid Society – Employment Law Center
NAACP
National Alliance of Postal and Federal Employees
National Association of Consumer Advocates
National Association of Human Rights Workers
National Association of Social Workers
National CAPACD
National Community Reinvestment Coalition
National Congress of American Indians
National Congress of Black Women, Inc.
National Council of La Raza
National Fair Housing Alliance
National Urban League
Poverty & Race Research Action Council
Service Employees International Union
Sojourners
The Leadership Conference on Civil and Human Rights
Woodstock Institute