Consumer advocates proposed prohibiting dealer markups and increasing federal oversight to combat alleged discriminatory indirect lending practices, in a U.S. House Committee on Financial Services hearing Wednesday.
“Many of the disparities we will discuss here today are only possible because the market for cars — especially car finance for used cars — is opaque and inconsistent,” said witness John Van Alst, an attorney at the National Consumer Law Center. “Dealers have tremendous discretion to charge consumers different prices.”
Rachel Cross, a policy analyst at Frontier Group, noted that dealer discretion on interest rates is often a contributor to discrimination. “Dealer-arranged financing has weaker regulations and oversight than direct loans,” she said, noting that excessive interest rates are one example of the kinds of “abusive and predatory tactics” seen in indirect financing.
Cross cited an instance when Santander Bank charged an interest rate that was higher than New York state’s usury limits. “57% of all loans in the [package of securities] generated in the state of New York had interest rates so high they would have been illegal if they had been direct loans between a consumer and a bank,” she said. “But, because they were dealer-financed and indirect loans, it was legal.”
Cross also called out Toyota Motor Credit, whose policies allegedly “lead to many African American borrowers paying $200 more [than similarly situated white borrowers] on average for financing.”
Congressman Al Green (D-Texas) called the hearing “long overdue,” referring to a 2018 study by the National Fair Housing Alliance that states “non-white vehicle buyers who were more qualified than whites received costlier loans 62.5% of the time.”
Green pointed to a lack of oversight from the Consumer Financial Protection Bureau as a factor that encouraged discriminatory lending practices. “Between 2013 and 2016, the CFPB brought enforcement actions against four indirect auto lenders for violating the Equal Credit Opportunity Act by authorizing and incentivizing discretionary dealer interest rates,” he said. “Under [former CFPB Director] Mr. [Mick] Mulvaney and [current] Director [Kathy] Kraninger, however, the bureau has not taken any public fair lending enforcement action against an indirect auto lender — or any lender at all.”
Kristen Clarke, president and executive director of The Lawyers Committee for Civil Rights Under Law, said the bureau’s pullback bore witness to the fact that auto lenders had abandoned controls — such as using a flat-rate system — previously set in place to reduce the incentive to pricing mark-ups. “We’re implicitly sending a green light to dealers and lenders across the country that this kind of discriminatory lending practice is OK,” Clarke said. “We’re seeing the resurgence of discrimination as we see the federal government retreating from this space. It’s not enough for the states to do this work.”
Members of Congress have five legislative days after the hearing date to submit extraneous materials and additional questions in writing to witnesses to be placed in the record.
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