Consumer Agency Warns Lenders on Bias in Auto Loans against blacks

March 21, 2013, 2:49 pm

The Consumer Financial Protection Bureau laid out its authority over auto lenders on Thursday and warned them to comply with fair lending requirements. The agency said that it was issuing the new instructions in response to discriminatory practices that resulted in Hispanic and black borrowers’ illegally being charged higher rates than whites for auto loans.

The guidelines affect both auto dealers and third-party lenders that make loans through dealers.

“Today’s bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination,” said Richard Cordray, the director of the agency.

Auto loans are the third-largest source of consumer debt, after mortgages and student loans. Americans owe a total of $783 billion in auto loans, which average $26,691, the agency said.

The Equal Credit Opportunity Act prohibits lenders from considering race, color, religion, national origin, sex, marital status or age when making any decision regarding a loan.

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Indirect lenders work with auto dealers by quoting an interest rate to the dealer at which they are willing to make a loan to someone buying a car. Dealers are then allowed to “mark up” that rate by as much as 3 percent, which they keep as profit. The consumer agency said that this practice could result in the payment of different rates on auto loans by similarly creditworthy borrowers.

“Consumers should not have to pay more for a car loan simply based on their race,” Mr. Cordray said.

The agency recommended changing the markup to a flat rate per transaction, instead of giving dealers an incentive to inflate rates for some consumers. The agency also urged indirect lenders to monitor markups more carefully and ensure they comply with the fair lending laws.

What was your experience with an auto loan the last time you bought a car?

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