In 1974, the United States enacted the Equal Credit Opportunity Act, which "prohibits credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or because you get public assistance."
But nearly 40 years after that law went into effect, some institutions may not be following it to the letter. According to Reuters, the Consumer Financial Protection Bureau recently issued a notice to lenders -- specifically auto lenders -- reminding them of the business practices they need to follow in order to comply with the Equal Credit Opportunity Act. Doing so is akin to saying, "We're not going to name names, but we've heard through the grapevine that some of you need to shape up fast."
The problem seems to lie with auto dealers, who often arrange financing with shoppers who haven't secured car loans on their own. When those shoppers apply for loans, dealers consult a partner bank or credit union to determine the appropriate interest rate (based on credit history, credit score, and other factors).
But frequently, dealers don't offer the suggested loan rate. Instead, they mark up that rate, then split the extra interest revenue with the bank or credit union that is providing the cash for the loan.
That in itself is okay. It can be distasteful, even predatory, but it generally falls within the bounds of legal business practices.
There is one major instance, however, when such practices are decidedly illegal, and that's when dealers show a pattern of charging higher (or lower) interest rates for borrowers of a particular race, religion, sex, age, and so on.
That appears to be what's happening. Specifically, the Consumer Financial Protection Bureau says that dealers have charged higher loan markups for African-American and Hispanic customers.
The recent bulletin makes it clear that the Bureau is now paying very close attention to dealer lending practices. It's even suggested that banks and other financial institutions may be liable for illegal markups, since they advise dealerships on their lending practices.
To remain on the right side of the law, the Bureau suggests that lending institutions set limits on the markups that dealers charge. It also encourages partner financial institutions to end the policy of splitting revenue from markups with dealers, instead instituting a system based on flat fees.
But the burden doesn't lie solely with dealers and banks. Consumers have to be willing to plan ahead and to read the fine print. In a related blog post, the Bureau encourages shoppers to look for a loan before they look for a car and to get a range of comparable quotes.
We'll keep you posted as the Bureau's look into lending practices moves forward. In the meantime, if you're shopping for a ride, follow mom's advice and do your homework.