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Federal agency looks at car loans

By Tara Baukus Mello ·
Saturday, November 16, 2013
Posted: 6 am ET

The Consumer Financial Protection Bureau held an Auto Finance Forum earlier this week to discuss the discrimination that can occur in auto lending. In particular, it addressed the issue that some consumers end up paying higher interest rates on their car loans not as the result of their credit worthiness, but because of their race or ethnicity. According to the CFPB, the impact of these practices may result in millions of additional dollars for auto lenders.

At the crux of the concern is the way auto dealers sometimes mark up auto loans, and receive financial incentives from the lenders they work with when they charge higher interest rates on car loans. The financial incentives often are not disclosed to consumers when they buy a car and obtaining a car loan interest rate at the dealership. As a result of these practices, the auto lenders might be in violation of fair lending laws.

CFPB analysis of car loan data indicates that these practices can result in African-American, Asian and Hispanic borrowers paying more for their auto loans than non-minority borrowers. Congress has said that while the CFPB does not have jurisdiction over car dealers and their practices, they do have jurisdiction over the largest auto lenders and their lending programs -- both those that lend directly to consumers as well as those that use auto dealers as an intermediary.

Do you think you have ever faced discrimination while getting a car loan?

Tara Baukus Mello writes the cars blog as well as the weekly Driving for Dollars column, providing practical financial advice for consumers as well as insight into the latest developments in the automotive world. Follow her on Facebook here or on Twitter: @SheDrives.

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The Car Guy
November 19, 2013 at 11:29 am

I have been in the automotive industry for years and while there is certainly discrimination prevalent in our business, most of your articles and opinions are written from the outside looking in at this issue.
However, there is a deeper, more prevailing issue with automotive lenders and their credit policies. Most lenders have gone to a tier system, to justify the rate which is charged to a customer, based on their credit score and financial situation. The amazing thing about this tier system is how easily we as automotive lender manipulate it. I have personally negotiated a rate reduction from 18% to 4.9% for one customer, with a low 600 score, while another customer with identical circumstances and score pays the 18% rate. what predicated my negotiation? Fitting the payment into the customer's budget, while the latter customer agreed to the payment, not worrying about the rate. The latter customer also knew they had a lower score, which made the rate more acceptable. This type of negotiation happens thousands of time per month, where lenders "move" the tier, to accommodate one person or another.
This practice is certainly a discrimination against many people, including a racial discrimination as discussed in your article. But it is more the result of the fiduciary relationship which exists between automotive lenders and dealerships, where dealerships are paid significant discount fees for processing the loans (as high $5,000 in some cases). Much of a dealership's profits are from the negotiations for financing and other aftermarket products.
Now, to address your article directly...Most lenders are NOT requiring copies of driver's license or other identification to fund their loans now. The reason? To avoid ANY TIES to a discrimination issue and only require the dealership to obtain the proper identification, pursuant to their dealer agreements. This being said, I've had many credit analysts make comments concerning the "ethnic origin" of the buyer or solicit such a response, to know who they are buying...
I am considered an "Expert" in the automotive, and currently work in this field (over 30 years), so I will remain anonymous...but everything I have stated is true and can be easily proven...

The Car Guy