CRL Cites Disparities
Hispanic and African-American car buyers still receive higher interest rates on loans financed through dealerships despite their attempts to negotiate pricing just as much if not more than white consumers.
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.
“As long as dealers can manipulate interest rates, car loans are a gamble for consumers,” said Chris Kukla, senior vice president of the CRL. “Car buyers can do their best to negotiate, but they are at the mercy of dealers whose compensation is tied to hidden interest rate increases. That's a formula for abuse.”
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.
Indeed, one of the biggest issues identified in the research involves a lender allowing the dealer to mark up interest rates offered to consumers, and to retain that markup as additional revenue, said John Flynn, president/CEO of Open Lending LLC/Lenders Protection, an Austin, Texas-based auto loan underwriter that counts credit unions among its clients. He recommended credit unions compensate auto dealers using only a flat fee arrangement such as a fixed percentage of the loan amount.
Flynn said his company's risk-based pricing tools allows the credit union to account for all costs in making the loan, including dealer fees to avoid any rate disparity based on dealer compensation.
“Members need to know that there are many credit unions actively looking for opportunities to help members who have been overcharged from an interest rate standpoint and over-pricing situation from dealership financing,” Flynn said. These recapture or refinance programs help put the member in a more affordable situation.”
The CRL said 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.
Flynn said the use of fully automated underwriting, flat fee dealer compensation and reasonable limitations on refundable back-end products can contribute significantly to help address the issues identified by the CRL research.
“Credit unions should try and serve as many members as possible, while maintaining financial responsibility and managing risk,” Flynn suggested.
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.
“What we’ve already seen amounts to tens of millions of dollars in overpayments each year in total. Across the entire indirect auto market, the total could be much greater than that,” said Patrice Ficklin, fair lending director at the CFPB.