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Dealer Markups on Car Loans Get More Attention

The New York Times recently reported about the case of a Hispanic car buyer named Pedro Lantigua who bought a new truck out of a trade in and agreed to a financing arranged by a dealer in Oklahoma City.

Aside from selling cars, dealers can also provide financing to their customers by arranging for them car loans through any lender in their network. They charge for this service by tacking the fee on the interest rate.

Not many car buyers know about this. But Lantigua knew the exact amount he was charged for the service—only after he filed a lawsuit against the dealership.

The 32-year old buyer agreed to pay $609 a month for six years or 72 months, but he did not know that a dealership fee of about $1,000 was included in his 12.6 percent interest rate.

Dealerships are not required to disclose how much they get from the extra charge they put on the interest rate. And consumer advocates and regulators like the Consumer Financial Protection Bureau (CFPB) are concerned about the discretion dealers have in marking up financing rates which leads to discriminatory lending.

cfpb gov

These observations have prompted consumer groups, regulators and even the government to look closely into the thriving auto lending business. (Auto loan originations are at the peak in the third quarter this year since 2007, reaching $97.4 billion, a report from the Federal Reserve Bank of New York shows. The market for securitized auto loans is also growing at the same time.)

Consumer advocates and the CFPB claim that non-white borrowers receive more expensive auto loans than white borrowers with same credit standings. Consumer groups say that dealer fees range from 2 to 2.5 percent on average which translates to hundreds or thousands of dollars of additional cost over the life of the loan.

Moreover, a study from the not-for-profit organization Center for Responsible Lending (CRL) in 2011 showed that dealers charge higher fees to car buyers with bad credit. Chris Kukla, the senior vice president, said that non-white borrowers are not proportionately represented in the subprime market.

The CRL has also observed that subprime borrowers also receive higher, marked-up interest rates which put them in a greater risk of getting behind their payments or losing their car.

The CFPB has suggested setting a flat fee to serve as the compensation for dealers’ service of arranging car loans for buyers. But the National Automobile Dealers Association (NADA) said it will only cost buyers more. NADA also contends that dealers charge not more than one percent interest for arranging financing.

The Justice Department has joined the investigations on whether the fees charged by dealers violate the Equal Credit Opportunities Act which forbids discriminatory lending against minorities.

But the CFPB does not have access to pieces of information like ethnicity and sex of individual borrowers to pinpoint where discrimination is taking place. Kukla also admitted that they cannot determine how much discrimination is happening because there is no available data.

Last October, a bipartisan group of senators sent the CFPB a letter to raise their concern over the bureau’s methodology in concluding that an issue such as discriminatory lending exists in the automotive industry. NADA shares the same concern.

Ally Bank, the source of Mr. Lantigua’s auto loan through the dealership in OKC, announced recently that the CFPB is investigating them after the bureau warned them about their failure to make sure that auto lending among their dealer partners is not tainted with discrimination.

The lender, which is one of the nation’s largest, said in an email that it has developed a dealer monitoring system to prevent discriminatory lending.

Despite arguments, NADA and consumer groups agree that consumers should shop around for auto loans before stepping into any dealership. And even if not foolproof, coming in with multiple offers in hand is the main defense consumers should put up, Kukla said.




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