Despite their attempts to negotiate pricing just as much, if not more than white consumers, Hispanic and black car buyers still receive higher interest rates on loans financed through dealers.
That finding was revealed in a new report, Non-Negotiable: Negotiation Doesn’t Help African Americans and Latinos on Dealer-Financed Car Loans, from the Center for Responsible Lending, a Durham, N.C.-based nonprofit research and policy organization.
The CRL said it gathered data for the report by conducting a telephone survey of 946 consumers who had purchased a car at a dealership in the prior six years.
Thirty-nine percent of Latinos and 32% of African Americans reported negotiating their interest rate, compared to 22% of white car buyers – yet people of color received worse pricing, according to the CRL report. Minorities also received higher interest rates compared to white buyers who did not attempt to negotiate at all.
More borrowers of color reported receiving misleading information about their loans from car dealers, the data showed.
African-Americans and Latinos were nearly twice as likely to be sold multiple add-on products as white consumers, according to the report. Add-on products such as various kinds of warranty and insurance coverage were sold at the dealership’s financing office, often with significant price markups.
Dealers sold African-Americans and Latinos multiple add-ons approximately 30% and 27% of the time, respectively, compared with 16% of the time for whites, the findings noted. Multiple add-ons were also associated with greater chances of delinquency and therefore create a greater risk of repossession, the CRL report read.
The CRL said similar to the disparities found in mortgage yield spread premiums, previous research has also found racial and ethnic disparities when borrowers financed their car loans at the dealership rather than directly from a bank or credit union.
Using data provided through class action litigation, a 2006 Vanderbilt University study found that borrowers of color were more likely to receive an interest rate markup when financing a car through the dealer, and that the rate is typically increased at larger amounts, than for similarly situated white borrowers.
The Vanderbilt study did a loan-level analysis of five major auto finance companies that indicated 54.6% of African-Americans received an interest rate markup, compared to 30.6% of whites.
Moreover, African-Americans on average paid over twice the amount of rate markup ($742) compared with the average markup paid by whites ($315). Latinos also paid higher rate markups than whites, although not as high as those paid by African-Americans.
Lenders involved in the class action lawsuits settled out of court, and instituted temporary interest rate markup caps of between two and three percentage points, the first of which started in 2003, the CRL said. Even with the last of the markup caps expiring in early 2010, auto industry representatives claimed that the caps have been generally accepted as a best practice with most lenders, which should limit discriminatory conduct.
The CRL report comes as the Consumer Financial Protection Bureau has vowed to crack down on discriminatory practices involving auto loans at dealerships.
In March 2013, the CFPB confirmed that some indirect auto lenders have policies that allow auto dealers to mark up lender-established buy rates and compensate dealers for those markups, which are referred to as markup and compensation policies.
The CFPB said because of the incentives these policies create, and the discretion they permit, there is a significant risk that they will result in pricing disparities on the basis of race, national origin and potentially other prohibited bases.
In a bulletin on the matter released on March 21, the CFPB said the Equal Credit Opportunity Act makes it illegal for a creditor to discriminate in any aspect of a credit transaction because of race, color, religion, national origin, sex, marital status, age, receipt of income from any public assistance program or the exercise, in good faith, of a right under the Consumer Credit Protection Act.
The CFPB recommended that indirect auto lenders ensure that they are operating in compliance with fair lending laws as applied to dealer markup and compensation policies including monitoring and addressing the effects of markup policies as part of a robust fair lending compliance program and eliminating dealer discretion to markup buy rates, instead compensating dealers with flat fees.
Meanwhile, in its report, the CRL also called for rules prohibiting dealer compensation that varies based on the interest rate or other material terms of the loan, other than the loan’s principal balance. Car dealers should be paid a flat fee by lenders for sourcing loans, not receive more for being able to convince unwary borrowers to pay a higher rate than they qualify for, according to the report.
Likewise, to address the findings that borrowers of color pay for more add-on products, the CRL recommended rules that require dealers to disclose the actual costs of every add-on product sold during the financing process and to reveal the cost of the car with and without add-on products. Regulation should also prohibit dealers from representing that the buyer is required to purchase ancillary products in order to obtain financing.