Auto loans: Hidden, discriminatory interest rate markups

Car lending is on the rise, and rising with it is a hidden, unfair, abusive and discriminatory practice: car dealer interest rate markups. Surveys show that at least two-thirds of Americans have no idea it happens. In a letter sent to the National Automobile Dealers Association, the Center for Responsible Lending is calling on dealers to release data showing who gets charged more and by how much.  

Dealer interest rate mark-up is the practice of adding extra interest to a consumer’s loan–dealers pocket this difference as compensation. How does it work in practice? A borrower qualifies for a loan at 5 percent interest, but the dealer raises it by as much as 2.5 percent more. The dealer tells the consumer, “Great news! We got you a great rate of 7.5 percent!”  The dealer then collects a large bonus payment, up to a thousand dollars or more, when it sells the loan to a lender.  The borrower gets stuck with higher car payments for the life of the loan. 

{mosads}Research, court cases and enforcement actions have shown that consumers of color have their loans marked-up more often, and by a greater amount, than white borrowers with similar credit profiles. Data from a series of court cases settled a decade ago found that African American and latino borrowers were twice as likely to be hit with a dealer interest rate markup, and that markup was on average twice as large as for a similarly situated white borrower.  Those lenders agreed to cap the amount of markup dealers could add to the interest rate for 10 years, and those agreements have all expired. 

Recent enforcement actions suggest that discrimination and unfairness still exist.  Just this week, Honda Finance Corporation agreed to pay $24 million in restitution to borrowers of color as a part of a settlement with the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ), after investigators discovered HFC’s policy to allow dealers to mark up the interest rate resulted in borrowers of color paying more in interest than white borrowers. This is not an isolated incident. The CFPB and the DOJ’s agreement with Ally Bank to settle claims of discrimination indicated African American, latino and Asian American car buyers who financed with Ally paid more in interest on their loans than similarly-situated white borrowers due to car dealer interest rate markups.  A recent settlement between the Department of Justice and Evergreen Bank found similar disparities in Evergreen’s motorcycle lending portfolio, also due to dealer interest rate markups.

In 2011, a CRL analysis of the auto industry’s own data estimated that consumers who took out loans in 2009 paid $25.8 billion in extra interest over the lives of their loans due to car dealer interest rate mark-ups. Since CRL released this report, NADA has attacked our research.  We have set out our data and methodology, and they are sound.  

CRL’s letter to NADA calls on the dealers association to release data that shows how much they are charging consumers in additional interest for compensation.  In the four years since we published data, NADA has not provided data that contradicts ours. If they are so certain our estimate is wrong, why not show the proof?  Certainly, as the trade group representing dealers across the country, NADA would have access to data that can estimate how much dealers collect from interest rate markups.  What is there to hide? 

These attacks obscure a consistent truth: Dealer interest rate markups are harmful to consumers, are discriminatory and are unfair.  NADA and the rest of the industry cannot hide the impact of dealer interest rate mark-ups forever, and there are signs dealer interest rate markup will receive the scrutiny it deserves. A recent New York Times editorial titled “Putting an End to Abusive Car Loans” identified dealer interest rate mark-ups as a predatory lending practice. A similar practice by mortgage brokers and lenders has already been banned in the home mortgage market. Several regulatory and enforcement agencies — including the CFPB, DOJ, the SEC and many state regulators — have launched further investigations into car lending practices, including dealer interest rate markups. 

We should not tolerate hidden fees that result in unfairness and discrimination in any financial marketplace. We also believe that data and transparency are vital to any good-faith discussion about lending policy. On this issue, the facts show that dealer interest rate markups are unfair and discriminatory, and it is long past time to end this practice.  

Kukla is a senior vice president at the Center for Responsible Lending, a non-partisan, non-profit which works to protect homeownership and family wealth.