A contestation is growing between the government and the auto industry, one of the key drivers in the US economic recovery, as the former continues to act against expensive auto lending to minorities and women.
A Justice Department senior official said last week that federal prosecutors are working with the Consumer Financial Protection Bureau (CFPB) to probe the reported discrimination in auto lending.
Dealers, in their role as a middleman in arranging auto financing for their customers, can mark up the interest rate given to them by lenders. The difference becomes their profit and goes directly to their pockets.
According to a study done by the bureau in 2011, the average dealer markup, or the points added to the auto loan rate to make profit, was 2.5 percentage points. It translated to an additional of $714 in interest payments on a 60-month auto loan. However, the National Automobile Dealers Association (NADA) countered to say that the markup is only 1 percentage point for new cars and 0.7 for used cars.
Recently, the CFPB accused Ally Financial of failing to make sure the dealers in their network keep the Equal Credit Opportunity Act.
In a forum last week, the CFPB suggested three pricing models for dealers to avoid discrimination while trying to make profit from arranging vehicle financing for consumers.
One is the compensation to dealers can be tied to the length of the loan and the loan amount through a hybrid system. Another is dealers can be paid a fixed percentage of the loan or a flat fee for every transaction.
While the bureau suggests more than a couple of alternative compensation models, it said that it welcomes any other strategy that can help reduce the risk of unfair lending. Lenders have the final say to make adjustments on how dealers are compensated.
CFPB Director Richard Cordray said, as quoted by The Washington Post, “We recognize that auto dealers play a valuable role in auto lending that occurs in this country, and they deserve to be compensated fairly for the work they do…(but) no one should have to worry about having to pay more to finance a vehicle because of race, ethnicity or any other protected characteristic under federal law.”
Early this month, a bipartisan group of 22 senators sent a letter to the bureau’s chief to ask for more proof of the existence of discriminatory lending practices in the auto industry.
In last week’s forum, the president of the National Association of Minority Automobile Dealers, Damon Lester, admitted that there are bad entities in the industry. He said that a markup policy should be adopted by dealers.
Lester also said that several dealers use markups to compensate for the risk in lending to people with bad credit. But consumer advocates contend that lenders already price the risk in the rates they give dealers.