Surprise, surprise: the nation’s auto dealers do not approve of the Consumer Financial Protection Bureau’s crackdown on a loan compensation system that rewards dealers for sticking car buyers with unnecessarily high interest and fees.
But the dealers assure us they are not looking out for themselves. A joint statement by the National Automobile Dealers Association (NADA) and the National Association of Minority Automobile Dealers (NAMAD) laments the potential loss of “a financing model” that “has been enormously successful in both increasing access to, and reducing the cost of, credit for millions of Americans.” The dealers go on at some length about the threat to convenience, competition, and consumer choice; by contrast, they have not a word to say about any possible impact on their own bottom line.
Here, then, are a few salient facts that, while nowhere to be found in this high-minded document, were rightly examined and considered by the CFPB before it decided to issue a guidance bulletin on potential violations of the Equal Credit Opportunity Act (ECOA):
- The practical effect of the indirect-financing system that the dealers defend is to create incentives for charging higher interest and/or fees than borrowers would otherwise qualify for.Typically, a third-party lender determines the least costly loan that it would be willing to give, and offers to pay the dealer extra for convincing the borrower to pay extra.
- It adds up to a lot of extra. Markups resulting from what a layperson might call dealer kickbacks (but which are politely known in the auto lending field as “reserves” or “dealer participation programs”) add an estimated $25.8 billion in hidden interest alone over the lives of the loans involved. Research also shows that the mere presence of a dealer interest rate markup increases the odds that borrowers will fall behind on their payments or have their cars repossessed.
- Repeating a well-documented pattern of the subprime mortgage era, the cost of these dealer markups falls disproportionately on Latinos, African-Americans, women, the elderly, and other historically disadvantaged population groups.
- Needlessly expensive auto loans, like needlessly expensive mortgage loans, aggravate the persistent divide in average wealth between white and Latino and African-American households. Nationally, the average auto loan stands at $26,691, and total auto loan debt has reached $783 billion, more than Americans collectively owe on credit cards and edging up toward what they owe on mortgages.
The CFPB has put the lenders on notice: if their commission arrangements lead to higher costs for car buyers of color and other protected groups, they could be found in violation of the fair-lending rules of the Equal Credit Opportunity Act.
The lenders say: don’t punish us for the sins of dealers. The dealers, for their part, protest that while they “strongly oppose any form of discrimination in auto lending,” they should not be punished on the basis of “a theory of discrimination that is based on a statistical analysis of past transactions – not intentional conduct…”
Another way of putting all this is that the lenders and dealers have, between them, constructed a loan-making apparatus expertly designed to cheat, and to cheat certain classes of people disproportionately, regardless of anyone’s provable intent. The CFPB is to be commended for finding a way to confront that outrage with the authority it does, in fact, possess.