Consumer Finance

Banks Are Now on the Hook for Race-Based Car Loans


Banks Are Now on the Hook for Race-Based Car Loans

Photograph by David Paul Morris/Bloomberg

Auto lenders, you’re up next. The Consumer Financial Protection Bureau put banks on warning Thursday that they could be liable for discriminatory car loans, even if they didn’t directly sell the loans to consumers. The bureau is concerned about research that has found that black and Latino borrowers may pay higher interest rates than white borrowers, even if they pose a similar credit risk.

The CFPB doesn’t have authority to regulate car dealers—the dealers won a massive lobbying effort to avoid oversight by the bureau—so instead, the CFPB is now targeting the banks that fund the car loans the dealers sell. The largest auto lenders include Wells Fargo (WFC), Ally Financial (ALLY), and JPMorgan Chase (JPM), according to the credit bureau Experian.

The bureau has zeroed in on how lenders compensate the dealers. Unbeknownst to many buyers, banks often approve borrowers for a loan at one interest rate but offer extra pay to dealers that give the borrower a higher-interest loan. That so-called dealer markup opens the possibility that the dealers will sucker certain people—say, African American borrowers—into higher-cost loans, according to the bureau. A 2010 report by the National Consumer Law Center found that markups in the past have cost black borrowers as much as six times more than white borrowers.

Thursday’s warning says if the lender has policies that encourage discriminatory practices, even if unintended, the banks could be sued for violating fair lending laws. The bureau says lenders should offer sufficient training so dealers don’t discriminate, and it says lenders should consider changing how they pay dealers entirely, perhaps switching to a flat fee per loan, regardless of the interest rate. The bureau hopes that without the extra cash incentive, dealers won’t be tempted to push more expensive loans.

Weise_190
Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

Race, Class, and the Future of Ferguson
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Companies Mentioned

  • WFC
    (Wells Fargo & Co)
    • $51.56 USD
    • 0.11
    • 0.21%
  • ALLY
    (Ally Financial Inc)
    • $24.88 USD
    • 0.16
    • 0.64%
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