The Continuing Saga Of The Consumer Financial Protection Bureau And Dealer Interest Rate Markup On Car Loans

Virgil Hilts
by Virgil Hilts

It is no surprise that U.S. automobile dealers have been in a tizzy the past few months as the Consumer Financial Protection Bureau (CFPB) has been rattling its swords threatening to ban them from marking up interest rates on car loans, a sacred profit center for dealerships. Using methodology that assumes a person’s race can be determined by their last name and their gender by their first name, the CFPB claims that certain protected classes are being discriminated against in terms of being charged higher interest rates and thus the practice must stop.

What is a surprise is that Congress is equally annoyed with the agency’s strategy and lack of transparency, and recently announced new regulations limiting their power. No matter the outcome, there is a real possibility that the unintended consequences of the CFPB’s actions will be higher car loan rates for you.

The three-year old CFPB faces several obstacles to reach their objective. The agency has been unable to produce a single example of a consumer complaint about this issue. They also have no authority over automobile dealerships, where cases of discrimination might exist, so their plan is to punish the banks for the actions of their dealers. Bear in my mind that lenders, be it a captive like Ford Motor Credit or a non-captive like Wells Fargo, never see the client, do not ask questions about race on credit applications, and pointedly do not ask for a copy of the buyer’s driver’s license until after the deal is done. Nonetheless, the agency has been demanding that banks produce data so they may study the customers’ first and last names and the rates they were charged.

Until three weeks ago the CFPB steadfastly refused to answer banks’ and Congress’s queries asking them to produce specifics of their strategy to uncover cases of discrimination. They were then summoned to a Senate hearing, where the CFPB chairman pledged to be more open and accountable. The House Financial Services Committee was not impressed and they imposed new measures on the regulator to insure they behave.

The CFPB then proposed an alternative method of compensating dealers: banks could pay them a flat fee for arranging consumers’ car loans as a substitute for rate participation. The problem with that scenario is that if Bank A approves a customer at 2.9% paying the dealer a $500 flat fee and Bank B approves the same customer at 3.9% with a $750 flat fee, the dealer will offer the latter to buyers. At which point the CFPB can produce another study and be outraged that people with certain first and last names were charged a higher rate.

The CFPB is not alone in their quest. The Department of Justice recently successfully prosecuted the type of case the CFPB is desperately trying to find. They fined a Korean-owned Los Angeles bank and a Korean-owned Mitsubishi dealership for discrimination for their charging Hispanics consumers higher interest rates than non-Hispanics. The CFPB has not acknowledged this case as it is not the type of racial discrimination they are seeking. Let’s face it, a Chrysler Capital or U.S. Bank will be perceived as “white” and if their dealers are charged with discriminating against minorities, they will be shamed by the media and the CFPB will be the hero.

The State of California – always irritated when the Feds find a business practice to regulate before they do – just announced a 2014 ballot initiative to ban interest rate markup by automobile dealers. The proposal includes other new dealer regulations, one of which prohibits dealerships from hiring individuals who have been convicted of identity theft. No dealer in their right mind would knowingly employ such a person but the strategy is to have it on the ballot so voters can think, “Damn car dealers, they must stop hiring convicted felons!” Like the Feds, Sacramento legislators know anything they can do to discredit automobile dealers will be cheered by the press and the populace.

So our question to the Best And The Brightest is this: if you are in the business of profiting by buying a product at wholesale and selling it at retail – and an interest rate is a product – should the government have the power to stop you from doing just that?

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2 of 51 comments
  • Frantz Frantz on Dec 04, 2013

    As a slimy car salesman I find it amusing that someone thinks I wouldn't jump at the chance to earn extra money from white people. Seriously. I do like people with poorish credit because they are more likely to say yes to anything that involves them getting into a car they cant afford (as in pay cash), but race has nothing to do with this. I personally drive a 1993 Caravan. I make decent money, but nothing more than what a gov drone does and I only get paid if I perform. Also, it's pretty rare that I make much money on the actual car. If rates can't be a profit center guess what will happen to the price of cars? I am working a two car cash deal at the moment where we are losing money on both cars and they fellow wants better discounts. I told him we were losing money and he laughed and said "if that were true then you wouldn't stay in business long, my son needs a car soon too so this will be a three car deal". I told him if he was also paying cash then I wasn't interested in ever meeting his son. There is plenty of info on how to get a great deal from a dealership out there, but it doesn't cover how we actually make our money, which we do need to do. Believe it or not, we aren't a government provided and subsidized service.

  • Ruggles Ruggles on Dec 05, 2013

    RE: "That is exactly what was found. The dealers were marking up black guys the most and white guys the least." First, the CFPB has NOT put out specific findings. Second, how in the hell would they know who is black and who is white? RE: "Women, both white and black, were somewhere in between. Is it wrong to add mark up? No. Is it wrong to do so based on race or sex? Yes." The best negotiators get the best deals, white, black, Asian, female, or whatever. If certain groups tend to be worse negotiators, they might pay more. Uneducated white men pay more than educated white men. It all depends on how you slice and dice the groups but first you have to have a way to determine who is who.

  • Alan GM is still dying. The US auto manufacturing sector overall needs to restructure. It is heavily reliant on large protected vehicles with far more protection than the EU has on its vehicles (25% import tariff).Globally GM has lost out in the EU, UK, Australia, etc. GM has shut down in Australia because it is uncompetitive in a global market. Ford still exists in Australia but is reliant on a Thai manufactured pickup, the Ranger which is Australia's second largest selling vehicle.The US needs to look at producing global products, not 'murica only products. Asians and Europeans can do it. America is not unique.
  • Duane Baldinger Ya my cupcake Mailman will love it!
  • Duane Baldinger Where can I send the cash? It's a surprise BDAY present for my cupcake Mailman. D Duane
  • Art Vandelay Pour one out for the Motors Liquidation Corporation
  • Bill Wade Norm, while true I'll leave you with this. My 2023 RAM is running Android 8 released in 2017.My wife's navigation on her GM truck is a 2021 release, I believe the latest. Android Auto seems to update very week or two. Now, which would you rather have? Anybody with a car a couple of years old NEVER sees any updates. Heck, if your TV is a few years old it's dead on updates. At least cell phones are rapidly updated. If your old phone won't update, buy another $200 phone. If your GM vehicle doesn't update do what, buy another $50,000 GM vehicle?