Earlier today, we reported that the Department of Justice had launched an investigation of U.S. auto lending practices. Specifically, the DOJ is concerned that minority borrowers are being offered loans with higher interest rates than those presented to their white peers.
Auto News reports that New York City is considering ways to rein in that kind of discrimination, and dealers aren't too happy about it.
In the past, some watchdog groups have complained about two shortcomings in the auto loan system that put minorities and lower-income borrowers at a disadvantage:
1) Since 2011, banks have been been subject to additional oversight from the Consumer Financial Protection Bureau. However, automakers, dealerships, and their lending arms are exempt from such regulation since they aren't considered banks in the eyes of the law.
2) When dealerships broker a loan, they often mark up the interest rate by as much as three points, generating additional cash for themselves. There's nothing wrong with that, per se, but since that markup is left to a dealership's discretion, and since dealerships don't operate under the same regulatory constraints as banks do, there's more opportunity for...unpleasant trends to emerge.
And so, New York City is mulling the possibility of cutting out middlemen entirely -- at least for used car loans. The city's Department of Consumer Affairs has begun recruiting lenders for a new auto loan program that would require lending institutions to adhere to strict guidelines.
The DCA program wouldn't prevent used car dealers from offering loans as they've always done. However, if those dealers work with lenders who participate in the DCA program, they wouldn't see the same loan revenue they've become accustomed to. Here are a few of the items that participating lenders must agree to:
- There must be no required add-ons included in the loan such as credit insurance, roadside assistance, extended warranty protection, or vehicle service contracts
- There must be no compensation for the secondhand auto dealer for referrals
- Lenders must accept no or low loan application fees (e.g., $25 or less)
As you might expect, that second item isn't too popular with New York City's used car dealers or the Greater New York Automobile Dealers Association. The latter has criticized the move as a restriction of choice for buyers and a reduction in competition. New York City, on the other hand, says that the program will offer lenders peace of mind by providing a certified lending system that's transparent and free of dealer markups.
Curious about the other restrictions that will be placed on lenders participating in the DCA program? You'll find an overview of the program in this PDF.