On March 21 the Consumer Financial Protection Bureau (CFPB) issued a groundbreaking bulletin detailing predatory practices in auto lending and explaining what the bureau plans to do about it. The Greenlining Institute has long advocated for regulation of lenders that mistreat consumers or discriminate against communities of color, we’re glad to see the CFPB moving aggressively.
The CFPB is the newest federal financial regulatory agency, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and is the only one created specifically to protect consumers. In just over a year and a half since its creation, the CFPB has already established itself as a champion of consumers. The agency went after credit card companies with deceptive practices and got over $200 million in refunds for consumers, and it increased transparency in lending through comprehensive education programs like this one aimed at those applying for mortgages.
Why is it important to regulate auto lending? First, automobiles play an essential role for U.S. consumers. A study by the State Department found that while ownership is on the decline, currently 95 percent of Americans own a vehicle, and 85 percent use theirs to get to work. Most car buyers take out a substantial loan: The average new car loan is $26,691 – more than half the household median salary of $50,054 per year.
Even now, the auto lending industry is under-regulated. (Car dealerships are mostly exempted from regulation due to an exemption built into the Dodd-Frank Act. The CFPB’s announcement, however, concerns the discrimination in lending practices, discussed further below, that target specific populations.) If consumers decide to get financing from the auto dealer instead of a financial institution, they may fall victim to interest rate markups. The dealer typically works with a third party called the “indirect lender” to evaluate the applicant, determine his or her creditworthiness, and then decide the appropriate interest rate for the loan. This is where the process can become abusive, because the dealership can unjustifiably add to that interest rate and pocket the extra charges. Most buyers aren’t aware this is happening. It’s a gouge that needs to be stopped.
And certain communities are more targeted than others. On March 22 I heard CFPB Director Richard Cordray speak at the National Community Reinvestment Conference about how people of color and immigrants are disproportionately targeted for interest rate markups. The agency will now include indirect auto lenders under the Equal Credit Opportunity Act (EQOA), which prohibits lenders from discriminating against consumers based on their race, ethnicity, national origin, sex, marital status, age, receipt of income from public assistance, or the exercise, in good faith, of a right under the Consumer Credit Protection Act. To be clear, the CFPB’s regulation will not stop interest rate markups, but rather will make it illegal to target buyers for these types of loans because of their race or national origin.
Director Cordray made the case for the importance of protecting the nation’s most vulnerable communities and quoted Dr. Martin Luther King, Jr. , saying “the time is always right to do the right thing.” Communities of color will be the new majority by roughly mid-century which means that our financial well-being will determine the strength of the American economy. Stopping discrimination in the auto lending industry is not just a moral obligation, but an economic imperative.
The consumers of this nation need regulators like the CFPB, and leaders like Richard Cordray to continue to fight on behalf of the most vulnerable. The Greenlining Institute will continue to support the expansion of the Consumer Financial Protection Bureau’s jurisdiction in the financial services sector. The Senate should stop delaying and confirm Mr. Cordray as the permanent CFPB director right away.