More Can Be Done to Protect Auto Consumers

By Enrique Lopezlira, Senior Policy Advisor, Policy Analysis Center, NCLR

The Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) reached a $98 million settlement with Ally Financial Inc. and Ally Bank (Ally) for discriminatory practices in auto lending.  The CFPB and DOJ determined that between August 2011 and December 2013, more than 200,000 African-American, Hispanic and Asian consumers were charged higher rates for auto loans, in violation of the Equal Credit Opportunity Act (ECOA). Latino consumers are a key component of the car industry.  According to Polk, an automotive research firm, Latinos make up about 10 percent of the industry, spending over $20 billion in new cars last year. This legal action is an example of the government’s commitment to ensure all consumers, regardless of race and ethnicity, are protected from abusive practices by financial institutions.

Although this enforcement action is an important marker for consumers, we are unconvinced that it will substantially improve the experience of minority auto borrowers going forward. Discriminatory practices in auto lending are nothing new. Back in 2004, General Motors Acceptance Corporation (GMAC) settled a class action lawsuit filed by the National Consumer Law Center on behalf of African-American and Hispanic consumers.   According to the lawsuit, despite comparable credit ratings as White consumers, minority consumers consistently and more frequently received higher rates from GMAC. Although GMAC made concessions in the 2004 settlement, old habits die hard:  GMAC changed its name to Ally in 2009 and they are continuing to discriminate against minority auto borrowers.

Going after auto lending institutions one by one makes it harder to address the root problem. The real problem is the auto dealers.  Auto dealers are the gatekeepers for lending institutions who want to make auto loans. Unfortunately, Congress exempted auto dealers from regulatory oversight by the CFPB after heavy lobbying from the industry.  This exemption has left CFPB to address auto lending discrimination indirectly.

A recent Bipartisan Policy Center report, co-authored by NCLR, explains that because auto dealers participate in and benefit from establishing the price of a loan, their activity should be considered a financial activity, and thus, should be regulated by the CFPB.  The report recommends that Congress correct their mistake and place auto dealer financing under the regulation of CFPB.

Notwithstanding the absence of regulatory authority over dealers, there is still more the Bureau can do today. Under its current rulemaking authority, the CFPB can and should develop a rule that squeezes out the practice of mark-ups.  In addition, it can collect data and issue a report on the impact of these practices on all consumers, especially minorities. Latino families need the CFPB to use all the tools at its disposal to attack discrimination in auto lending in a systematic and comprehensive way, not piecemeal.   Only then will minority auto borrowers get the relief they deserve and have been waiting for so long.