Putting an End to Abusive Car Loans

Auto loans have long been a bastion of predatory lending and racial discrimination. Until the federal Consumer Financial Protection Bureau was established, auto lending by banks was only lightly regulated, and lending by nonbank finance companies escaped federal regulation altogether. Greater scrutiny of banks by the bureau since 2013 has resulted in fines totaling $18 million and in payments totaling $136 million to 425,000 black, Hispanic and Asian borrowers who were charged higher auto-loan interest rates than comparable white borrowers.

Now, in a regulatory breakthrough announced last week, the consumer bureau has begun to supervise nonbank auto lenders, which make up some 40 percent of the auto-loan market and provide financing to more than seven million consumers a year.

The new supervisory framework will allow regulators to oversee at least 90 percent of all nonbank auto loans and leases, including subprime loans, which are intended for borrowers with damaged credit histories. Small lenders that generally operate locally and are supervised by state regulators will not be federally regulated.

Most auto dealer profits are made not by selling cars but by making auto loans that often contain hidden finance charges and other essentially useless add-nos like credit insurance. Take dealer interest-rate markups. When a consumer opts for “dealer financing,” the dealer is basically acting as a middleman between the car buyer and the lender. The lender — say, a finance company owned by the car maker — tells the dealer the interest rate it requires to do the loan, but gives the dealer discretion to quote a higher rate to the borrower on the understanding that any extra revenue will go to the dealer or be shared by the dealer and the lender. This discretion has led to minority borrowers paying higher interest rates than white borrowers with similar credit histories. A report by the Center for Responsible Lending estimated that dealer markups on loans made in 2009 would cost consumers an additional $25.8 billion over the lives of their loans.

Of course, dealer-arranged financing is not always a bad deal, and dealers should be fairly compensated for their services. But for many consumers, especially for those without other financing options, dealer-arranged financing can lead to unfair and deceptive lending, which is illegal under federal consumer financial law.

Predatory car loans, like abusive mortgages and exorbitant student loans, are also an economic drag. In addition to skimming money from consumers, they have been linked to higher odds of default and repossession for subprime borrowers, which can endanger the ability of those borrowers to get and hold jobs. Available evidence indicates that the ranks of low-income Americans are at special risk of auto-loan predation. Since 2009, subprime auto lending has more than doubled, while lending on terms that reflect a good credit history has increased by only about half.

The consumer agency, having rightly asserted its authority over non bank auto lending, must now use its enforcement powers to put an end to abusive car loans.

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