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Skin Color, Not Credit Risk, Tied to Auto Finance, Says Report

By Charlene Crowell

Nationwide, auto loans represent the third highest category of consumer debt. And according to new research, the color of your skin has a lot to do with how much debt is incurred.

Discrimination in Auto Lending, authored and published by the National Fair Housing Alliance (NFHA), found that despite federal laws banning credit discrimination by race or ethnicity, race remains a key factor in the cost of financing auto loans.

According to the report, “This discrimination has undoubtedly played a part in creating the racial and ethnic wealth gaps and credit access disparities that exist in the U.S. today, and it will ensure that they persist if allowed to continue unchecked.”

Like secret shoppers, NFHA sent eight teams of testers to dealerships to inquire about purchasing the same vehicle. Each team was told to ask the same questions and then report on their experiences. Seven of the teams were non-White and had both higher incomes and credit scores that of the eighth and White tester.

All testers encountered challenges to securing information needed to secure the best auto loan available. However, the Non-White testers noted being treated disrespectfully and receiving a pricier quote for finance than the White testers. Numerically, the sum of experiences found:

  • 75 percent of the time, White testers were offered more financing options than Non-White testers;
  • 62.5 percent of the time, Non-White testers who were more qualified than their White counterparts received more costly pricing options; and
  • On average, Non-White testers who experienced discrimination would have paid an average of $2,662.56 more over the life of the loan than less-qualified White testers.

“Such high rates of discriminatory treatment are alarming and extremely rare in similar audit-style investigations conducted in the mortgage lending industry,” states the report. “Although it has its bad actors, the mortgage lending industry has been regulated and monitored for civil rights violations for decades. It is imperative that auto lending regulations, particularly those that are designed to fight discrimination, are similarly robust and regularly enforced.”

Earlier research by the Center for Responsible Lending (CRL) reached similar conclusions.  A lack of transparency, dealer mark-ups on interest financing, and practices known as ‘loan packing’ and ‘yo-yo’ scams have all been cited by CRL.

Loan packing is a term used to describe how dealerships steer consumers into bundling several services and/or products that effectively boost purchase and finance costs. Often, many consumers do not know is that these products can often be purchased far cheaper if they were to secure them independently of the dealership.

Yo-yo scams in auto financing occur when a consumer drives a car off the dealer lot without finalizing its finance. Technically, if the loan paperwork has not been signed but the consumer has the use of the vehicle – especially overnight or longer — the consumer unwittingly has taken delivery on the car. By the time the consumer returns, the dealership hikes the price of the vehicle and interest – the ‘yo-yo’. At that point, the consumer has next to no opportunity to negotiate price or finance rates. If a trade-in of an older car is involved, dealerships often tell these kinds of customers that it has already been re-sold.

Commenting on the new NFHA findings, Delvin Davis, a senior CRL researcher said, “Racial discrimination should not be tolerated with any financial product – which makes regulation especially important when the product is one of the most expensive investments a family will make.”

In recent years, the Consumer Financial Protection Bureau (CFPB) found racial discrimination in interest rate markups, then sued and settled these issues with banks and financing arms of major auto manufacturers.  For example, Ally Financial and Ally Bank settled its lawsuit in 2013 for $98 million. In 2015, Honda’s settlement was $24 million and Toyota’s in 2016 was $21.9 million.

NFHA also likened auto discrimination to yet another more form of bias that burdens Blacks and other consumers of color.

“Too often the people in this situation are people of color whose neighborhoods have been starved of investment and whose ability to move to neighborhoods that better connect them to opportunity has been constrained by discriminatory policies and practices. And too often, when they seek a loan to finance an auto purchase, they face discrimination again.”

The Equal Credit Opportunity Act (ECOA) makes it illegal for creditors to discriminate against credit applicants based on race, color, religion, national origin, sex, marital status, or age.

Under this law, consumers have the right to:

  • Know whether your application was accepted or rejected within 30 days of filing a complete application.
  • Know why your application was rejected. The creditor must tell you the specific reason for the rejection or that you are entitled to learn the reason if you ask within 60 days. An acceptable reason might be: “your income was too low” or “you haven’t been employed long enough.” An unacceptable reason might be “you didn’t meet our minimum standards.” That information isn’t specific enough.
  • Learn the specific reason you were offered less favorable terms than you applied for, but only if you reject these terms. For example, if the lender offers you a smaller loan or a higher interest rate, and you don’t accept the offer, you have the right to know why those terms were offered.

A second federal law, Unfair, deceptive, or abusive acts and practices (UDAAP) went into effect with the Dodd-Frank Wall Street Reform Act. Under UDAAP financial product and service providers are not allowed to coerce or deceive consumers into making unwanted purchases. They are also not allowed to mislead consumers through specific statements or through a lack of clear and full disclosure.

“NFHA’s investigation is timely and underscores the need to maintain strong anti-discriminatory protections and enforcement, including the Consumer Bureau’s indirect auto lending guidance that addresses discriminatory pricing in the auto financing market, “said Mike Calhoun, President of the Center for Responsible Lending. “We commend NFHA for their incredible work and urge lawmakers at the state and federal level to use their power to fight against this type of unlawful discrimination and financial abuse.”


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