Approximately eighty percent of all automobile buyers requiring financing, get their loans through the dealership where they are purchasing their vehicle. The dealerships extended hours and “approval while you wait” make it easy for consumer’s to get their financing and their new vehicle the same day. According to a recent report from the Federal Reserve Bank of New York, what you gain in convenience, you pay for in high interest rates and fees. This problem has prompted a number of government investigations into the growing business of auto lending.
The latest reports show that car loan originations have hit its highest level in seven years. The rates offered by dealerships are usually higher than most competitive rates and are often front-loaded, meaning you pay more interest up front. Add-ons, such as extended warranties, VIN etching, and insurance are easily rolled into the total amount, leading consumers to purchase things they do not need. According to consumer advocates and the Consumer Financial Protection Bureau, people with bad credit are charged higher fees and African-American, Asian and Hispanic borrowers often end up paying more than white borrowers with comparable credit backgrounds. In some cases, a difference of 10 to 30 basis points was observed.
The consumer protection bureau says that it has found tens of millions of dollars in disparities between minority and white automobile purchasers and an investigation into whether these fees violate fair lending rules is now being looked at by the Justice Department. A senior official of the housing and civil enforcement section, disclosed during an industry trade forum last week that the department was in the middle of a number of joint investigations with the consumer bureau about auto loans. The investigations center on whether dealers have violated the Equal Credit Opportunities Act, which prohibits credit discrimination based on minority, religious or other protected statuses.
Finding out where that discrimination is taking place is difficult. The consumer protection bureau does not have access to information on individual consumers to determine factors like sex and ethnicity. Instead, it must rely on small bits of information, like the borrower’s name, to make some general assumptions about ethnicity and credit quality. For now, their advice to consumers is to shop around for loans before walking into a dealership.
