The Consumer Financial Protection Bureau, which is charged with looking out for consumers when it comes to all things financial, has just found itself in trouble with Congress after it began looking at what it said were disparities between minorities and non-minorities when it comes to auto finance transactions.
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The House Committee on Financial Services, saying the consumer agency is overreaching by using questionable data on lenders, passed legislation Thursday by a vote of 47-10 (which included 13 Democrats) making the consumer agency jump through more hoops just to start poring over their books.
And depending on whom you ask, you may now get a better deal, or you may still suffer discrimination.
Here’s what you need to know.
About 80% of all new vehicle purchases are financed, and the CFPB in 2013 started targeting the more than 30 million auto loan transactions that typically occur each year. The auto finance market is worth more than $900 billion and auto loan debt is the third-biggest debt burden for U.S. consumers, behind mortgage loans (70%) and student loan debt (10%). According to the National Association of Minority Auto Dealers (NAMAD), more than 30% of auto buyers are minorities, while just 5% of auto dealerships are minority-owned. The CFPB says that in many cases those minority borrowers may have paid higher rates than whites as part of what’s known as the “dealer reserve.”
These are negotiations where the auto dealer served as a loan broker to the car buyer to help push the sale through. But in some cases, as much 2.5% in additional interest was tacked on to the loan when the dealer sold the loan to another lender, keeping much of the difference in compensation, sometimes as much as $1,000 per deal. The CFPB says non-whites paid the mark-up, while whites didn’t, and warned auto lenders in March 2013 they’d be investigating if they continued the practice. Consumer advocates like the Center for Responsible Lending say “dealer reserves” could have cost consumers who bought cars in just 2009 alone more than $26 billion over the life of the loan.
But trying to find out who was a minority among those millions of auto loans wasn’t as easy as finding minorities who apply for mortgages.
That’s because unlike mortgage applicants, auto-loan applicants don’t have to disclose their race or ethnicity; it’s strictly prohibited under the 1974 Equal Credit Opportunity Act (ECOA).
So the CFPB used a proxy method of determining a person’s racial composition by looking at the names of the loan applicants and cross-checking them to where they lived, to see if they had been discriminated against under ECOA.
The CFPB brought complaints against two auto lenders, slapping Ally Bank
then the second-largest U.S. auto lender behind Wells Fargo
with $98 million in fines and restitution in December 2013, as well as American Honda Finance Corp., the sixth-biggest auto loan lender in 2013, with $24 million in penalties in restitution to borrowers in July of this year.