Auto Lending’s Fairness Problem
Skin Color Remains A Factor In Higher Car Loan Rates, Payments. Efforts To Fix It Are Equally Depressing.
More than anything else, a car represents freedom. It enables you to take that job across town, escape to the desert for the weekend, run errands, visit distant loved ones, and enjoy countless other opportunities.
But like most freedoms, the litmus test of who gets access to those opportunities isn’t always equal for all. In fact, the same factors that have driven decades of societal discrimination—particularly race—are apparently alive and well when it comes to financing a car.
“Years of data show that unfair, racially discriminatory treatment of consumers is a growing problem in the auto lending industry,” said Mike Calhoun, President of the Center for Responsible Lending, reacting to the 2018 study. “This is especially true for low-income families of color, where a car is often one of the biggest purchases made by a household.”
An Unfair System
Even when they were more qualified with better debt-to-income ratios, incomes, and credit histories, non-white testers in the NFHA study received more expensive pricing options than white testers 62.5 percent of the time. Seventy-five percent of the time, they also received fewer financing options than white testers. Over the duration of the loan, non-white testers would have paid an average of $2,662.56 more than white testers.
“Being charged more for credit despite being financially qualified for better rates, especially on big-ticket items like a car, can have devastating impact on a family’s monthly budget and financial stability,” said UnidosUS associate director for economic policy Lindsay Daniels. “Unfortunately, this is a familiar experience for many Latinos, one the community knows well after experiencing similar abuses in the years leading up to the foreclosure crisis.”
Findings of racial discrimination in auto lending led the Consumer Financial Protection Bureau to issue guidance in 2013 meant to protect consumers from discrimination—including by race and sex—at any part of the auto financing process.
However, the Trump Administration rolled the Obama-era rule back in 2018, arguing that already existing fair lending laws were adequate in addressing the problem.
Debate over the rollback and its effects largely broke down along party lines. Democrats and consumer watchdog groups insisted the additional protections were needed due to the pervasive nature of discrimination in auto lending. Republicans and the auto industry claimed that the CFPB guidance amounted to interfering in the auto lending business and that the stricter guidelines could actually result in lenders being less active in underserved communities.
A Black-And-White Issue
While disagreements over the CFPB guidance and its rollback continue, the inequities of the auto lending industry linger.
According to a 2008 study published in the American Economic Review, black borrowers pay higher interest rates than white borrowers—10.6 percent to 9.57 percent. This means that for an auto loan of the same amount and duration, black borrowers have higher monthly payments. For example, a borrower who takes out a five-year loan for $25,000 at a 10.60 percent interest rate will pay $32,315 over the lifetime of the loan, while the same loan at a 9.57 percent interest rate will pay $31,554—a difference of $761, according to an online car payments calculator. Black borrowers are also more likely to use vehicle finance company loans, which the study’s authors note generally have higher interest rates than bank loans.
Markups can push the interest rates charged to non-white customers up even more. Black borrowers were three times as likely as white borrowers to be charged an interest rate markup on their loans from one auto finance company, according to a 2003 study that looked at 1.5 million loans. When black borrowers were charged a markup, it was higher: an average of $557 for a subjective markup compared to white borrowers’ $227.
“There is an extensive history of discrimination in the auto lending industry, and much of it is attributed to unfair dealer markups on auto loans,” according to the NFHA study.
Can The Situation Be Fixed?
In order to remedy the unfair lending practices facing minority populations, the NFHA study recommended a slate of potential fixes. They include stricter enforcement of state-level anti-discrimination laws, restoration and expansion of CFPB oversight regarding the issue, clearer disclosures about loan terms and costs, and getting rid of dealer markups. Another solution for consumers, however, might simply be to skip the auto loan process altogether.
But no matter the perspective on these possible solutions, there’s broad consensus that having access to a car—and the many freedoms it unlocks—should never be impacted by race or other demographics.
“Personal automobiles are necessary in most communities to access employment, education, health care, and many other essential services,” said Seema Agnani, Executive Director, National Coalition for Asian Pacific American Community Development (National CAPACD). “By charging people of color more for their auto and financing, less disposable income is available for their household and family.”
“All communities of color are entitled to the same economic resources and opportunities that this nation has promised, but in many ways, has failed to deliver,” Agnani said.