Racial discrimination is illegal in the U.S., but we see instances of it all the time. The Consumer Financial Protection Bureau is worried about the effect that discrimination if having on car shoppers, and according to the Washington Post, the federal agency is now taking steps to end it.
RACIAL DISCRIMINATION IN AMERICA: A VERY BRIEF OVERVIEW
In 1868 -- three years after Lee surrendered at Appomattox, ending the Civil War -- the United States added the 14th Amendment to its Constitution. The Amendment was meant to guarantee citizenship and equal rights for former slaves and to prohibit discrimination on the basis of race.
In the real world, however, the 14th Amendment didn't work as well as it did on paper. Court decisions like Plessy v. Ferguson in 1896 meant that racial discrimination remained a part of daily life in America for decades.
In 1954, Brown v. Board of Education laid out a truer vision of racial equality -- one without separate schools, buses, and lunch counters for whites and blacks. Unfortunately, that didn't work quite as well as anyone had hoped, either.
Ten years later, the landmark Civil Rights Act of 1964 was passed, making it awfully clear that discrimination on the basis of race, color, religion, and other specified characteristics was a big ol' no-no.
You'd have thought that might've settled the matter once and for all, but mistreatment of racial minorities persisted to such a degree that Congress had to enact yet another law, the Equal Credit Opportunity Act, in 1974, which made it illegal for any creditor to discriminate on the basis of race, sex, or any other characteristic set out in the Civil Rights Act, plus age and marital status.
Forty years later, some auto lenders still haven't gotten the hint.
CONSUMER FINANCIAL PROTECTION BUREAU
In the wake of the Great Recession, Congress enacted a very different series of laws meant to rein in banks, whose freewheeling lending policies helped spark the global financial meltdown. One of the things those laws achieved was the creation of the Consumer Financial Protection Bureau in 2011. Among other things, the CFPB ensures that banks follow proper lending practices -- like, for example, not discriminating against borrowers based on the color of their skin.
Car dealers, automakers, and their financing arms aren't technically considered banks, so they're not technically under the CFPB's jurisdiction. But this week the agency proposed expanding its oversight to include the nation's 38 largest auto lenders, all of which handle more than 10,000 auto loans per year. In 2013, those institutions served some 6.8 million Americans.
The CFPB's push toward expansion isn't unexpected, and some would say that it's long overdue. In March of 2013, the CFPB sent a notice to America's auto lenders, reminding them that they were subject to the Equal Credit Opportunity Act. The notice came in response to numerous reports of lenders discriminating against car shoppers on the basis of race.
And that's not all: in December of 2013, one of the country's largest auto lenders, Ally, shelled out $98 million to settle discrimination claims lodged by the CFPB. Those claims suggested that Ally had a pattern of discriminating against non-white borrowers, with African Americans treated marginally worse than Hispanics and Asian/Pacific Islanders.
THE PROBLEM, THE SOLUTION
To the CFPB, the underlying problem with auto lenders is what's know as "the markup" -- the percentage that a dealership adds to interest rates of auto loans that it arranges. That percentage varies from borrower to borrower.
On the one hand, the markup seems fair. After all, the dealership is arranging the loan, it seems reasonable that it should get, as they say, "a taste".
On the other hand, the markup is left solely to the dealer's discretion, and that can lead to trouble. Specifically, the CFPB argues that it opens the door to discrimination.
A majority of car buyers choose to finance their purchases through optional, indirect financing at dealerships. Dealers often discount these interest rates to earn their customers’ business. The CFPB guidance attempts to pressure auto finance sources into changing the way they compensate dealers to a “flat fee” that dealers cannot discount for their customers. This action would eliminate a dealer’s ability to “meet or beat” a competitors’ finance rates and significantly limits the market competition that frequently provides customers a lower interest rate than those offered by banks or credit unions.
The counter-argument to NADA's claim is, of course, that those discounts get applied unfairly. NADA has tried to minimize the opportunity for abuse by encouraging dealers to set markup ceilings and to keep records of the rationale behind all discounts.
However, consumer groups aren't satisfied. In much the same way that FICO credit reports explain why your credit ratings aren't up to snuff, advocates want dealers to disclose the rationale behind all rates, even when there's not a discount.
Racial discrimination is illegal. But while many lenders follow the letter of the law, they may not follow its spirit, finding clever, hurtful ways around the safeguards that legislators and courts have put in place.
It's clear that some auto lenders aren't playing by the rules. To date, the CFPB has returned $56 million to 190,000 car loan recipients who have experienced discrimination, and it wants to do more.
Whether or not CFPB's expansion plan is approved, there's one way you can be sure you're getting the best deal possible on your next auto loan: don't rely on dealers for your best loan rate.
Shop online. Talk to your bank. Explore a range of other resources for your loan. In the end, who knows? The dealer may be able to beat the lowest rate you've found. But if you haven't done your research, you'll never know.
For a quick primer on auto loans, do yourself a favor and click here,