A battle is brewing between the auto industry and the government as regulators move to prevent car dealers from charging women and minorities higher prices.
Dealers have the discretion to mark up the interest rate on car loans they arrange through lenders, a practice that can boost the profit on a sale of a car by hundreds of dollars. Advocacy groups have long warned of disparities in the number of black and Latino borrowers hit with these higher fees and questioned whether the practice breeds fair-lending violations.
On Thursday, a senior official at the Justice Department said federal prosecutors are teaming up with the Consumer Financial Protection Bureau to investigate possible discrimination in auto financing.
"We have a number of ongoing joint investigations in the indirect auto-lending space," Steven Rosenbaum, chief of the housing and civil enforcement section at Justice, said at a forum hosted by the CFPB on Thursday.
In a recent regulatory filing, Ally Financial disclosed that the CFPB had accused the company of failing to prevent the dealers it does business with from violating the Equal Credit Opportunity Act. The auto lender warned investors that the case could result in fines or a settlement. People familiar with the probes who were not authorized to speak publicly say other lenders have received similar warnings.
A 2011 study by the Center for Responsible Lending found that the average dealer markup on a car loan was about 2.5 percentage points, or $714 in additional interest payments on a average 60-month loan. Researchers at the National Automobile Dealers Association, a trade group, contend that the rate is closer to 1 percentage point for new cars and 0.7 for used vehicles.
At the forum, CFPB officials suggested three alternative pricing models that would allow dealers to make a profit without discriminating against certain consumers.
Auto dealers could be paid a flat fee on each transaction or a fixed percentage of the loan. Another approach calls for a hybrid system in which compensation would be tied to the amount of the loan and the duration of the contract.
The CFPB is not promoting a particular option. Officials said the agency would welcome any strategy that might mitigate fair-lending risks. It is ultimately up to lenders to change the dealer compensation structure.
"We recognize that auto dealers play a valuable role in auto lending that occurs in this country, and they deserve to be compensated fairly for the work they do," said CFPB Director Richard Cordray. But "no one should have to worry about having to pay more to finance a vehicle because of race, ethnicity or any other protected characteristic under federal law."
The bureau cannot police car dealers, but it has jurisdiction over the banks and other lenders that provide auto financing. In that capacity, the CFPB issued a bulletin in March explaining that lenders offering loans through dealerships are responsible for illegal, discriminatory pricing. It encouraged lenders to establish a monitoring system or impose controls on dealer markups.
