A bill to allow racially discriminatory car lending practices is up for a vote in the House this week. If it passes, it could restore a system that routinely charges black and Latino borrowers hundreds of dollars more for car loans than similarly-qualified white borrowers.
The legislation would override the Consumer Financial Protection Bureau’s efforts to combat the auto loan discrimination and prevent the CFPB from re-issuing the rule until it produces more research on the matter. With more than 50 Democrats joining scads of Republicans in co-sponsoring the measure, H.R. 1737 is a rare example of bipartisanship in 2015.
It’s also bad legislation, says the White House. The Obama administration issued a statement formally opposing the law on Tuesday, saying it “would revoke guidance…that helps ensure customers are not charged disproportionately higher prices for auto loans because of their race, color, religion or other characteristics that should have no bearing on loan decisions.“
The agency believes it’s proven that the traditional way auto loans get made results in black people systematically getting charged more than white people with the same credit histories and borrower qualifications, regardless of what salesmen intend.
The whole thing centers on what’s called “dealer markup.” When a buyer opts for car financing directly from the dealer, the dealership sends information on the borrower to a third party — the finance arm of their parent company, a traditional bank, or a non-bank lender willing to extend credit to people who buy vehicles — and waits to find out what the lender plans to charge for the loan. Before showing that offer to their customers, the dealer tacks on some amount of additional interest to the loan offer.
The revenue this dealer markup generates is very important to the car-selling business as it operates today. More than a dollar out of every five that a dealer makes for the year will come from lending activity. Dealerships got 23.3 percent of their profits from financing in 2014, and lending has furnished a larger and larger share of dealer profits for years now. A chart from the National Automobile Dealers Association illustrates the trend:
There’s nothing inherently untoward about dealer markup as a business practice. The CFPB believes that “that auto dealers play a valuable role in facilitating auto finance transactions, and they deserve to be compensated fairly for the work they do,” as agency spokesman Sam Gilford put it to the American Banker.
The problem isn’t markups, they say, but consistently higher markups for non-white auto buyers. Critics from the auto industry and the financial industry say the agency’s findings are flawed and that further study will vindicate dealership practices. The agency’s methodology involves using a combination of borrower surnames and geographic data to estimate their ethnicity, and the industry thinks that statistical screening method is producing inaccurate data.
But dealer markups have been far higher for black and latino borrowers than white borrowers for decades, as the National Consumer Law Center’s Stuart Rossman notes in U.S. News and World Report. When borrowers sued dealers back in the 1990s, they didn’t have to use the partly-anonymized data that the CFPB is using today. They uncovered that “dealers were twice as likely to add a markup to the loans of African Americans,” Rossman writes, and that even when dealers marked up both white and black borrowers’ loans, the markup was far higher for the minority buyer. Their suit uncovered that white Ford buyers paid an average markup of $156 in Wisconsin, for example, compared to $1,041 on average for a comparable black buyer.
Even without the nerdy debate over the agency’s research methodology, the CFPB’s efforts to police car loans would be inherently messy. The Dodd-Frank financial reform package that created the agency includes language specifically barring it from overseeing auto dealerships. That forces the agency to target the lenders that partner with dealerships rather than directing its rulemaking and enforcement actions at the companies that are making actual customer-by-customer decisions about what rates to charge.
That jurisdictional dynamic may help to explain why so many Democrats have signed onto this particular effort to undermine a CFPB action. Such efforts have been common since Republicans retook Congressional majorities. But usually, those bills to rein in the young and aggressive agency’s work to combat consumer scams have not drawn bipartisan backing.
Over the summer, Sen. Elizabeth Warren (D-MA) began trying to craft legislation to shore up the CFPB’s oversight of dealerships. But the effort didn’t immediately gain traction with colleagues, in part because dealerships wield unusual political clout. With nearly three quarters of a trillion dollars in annual revenue and a presence in just about every congressional district around the country, dealerships are a tough constituency to take on even for someone as influential as Warren.
This piece originally misidentified the legislation as H.R. 1373. It is H.R. 1737.