Why Don’t Consumer Protections Apply When Buying a Car?

When the Consumer Financial Protection Bureau (CFPB) was created in 2010 as part of landmark financial reform to protect American consumers, auto dealers were notably excluded from the CFPB’s authority. Although a car is most Americans’ second-largest purchase, the only federal agency dedicated to consumer protection has been unable to directly regulate auto lenders to prevent discriminatory practices.

With outstanding car loans totaling $935 billion, fairness and transparency in auto lending is essential for a fair economy that works for all communities. Though Congress has yet to introduce a bill to bring auto lending under CFPB scrutiny, the time is right for a real legislative fix that would end carve-outs originally included for the auto lending industry.

Many other industry and consumer experts have recognized the need for a change and have come out in support of reform. Last week, the Bipartisan Policy Center (BPC) published a blog post urging Congress to level the auto lending playing field. The call to give the CFPB authority to weed out discrimination in the auto industry is consistent with a September 2013 report from BPC’s Financial Regulatory Reform Initiative.

Currently, auto dealers are given wide leeway in how they charge interest rates to consumers, often varying and raising rates for different consumers without reason. While this often unfair practice affects all car buyers negatively, research shows Blacks and Latinos are more likely to see an interest rate markup than White consumers. Controlling for creditworthiness, Latinos and Blacks still typically receive higher markups than White borrowers.

While the CFPB already has taken action to root out auto lending discrimination, it must currently do so through indirect means, by focusing on banks that auto dealers work with rather than the unscrupulous auto dealers themselves.

Through a strong legislative fix, Congress could remove the needless exclusion of auto lending from the CFPB’s authority and bring fairness to a market impacting a highly significant portion of consumers’ financial lives.

For most Americans today, having a car is a necessity, not a luxury. From transportation to and from jobs to trips to the grocery store, cars remain a major part of life for the vast majority of Americans. Communities of color deserve to shop for cars free from interest rate discrimination.