Study that finds discrimination in car loans draws fire

A study that found discriminatory lending practices by car dealers has drawn immediate fire from dealer and lender associations for its methodology.

The study, “Non-Negotiable: Negotiation Doesn’t Help African Americans and Latinos on Dealer-Financed Car Loans,” was released in late January by the nonprofit Center for Responsible Lending in Durham, N.C.

It comes as automotive lenders and dealers face off against the Consumer Financial Protection Bureau over the dealer reserve, the added interest that lenders allow a dealership to tack onto an auto loan as compensation for acting as a middleman on the loan.

The CFPB says that allowing dealerships to set the size of the markup, generally up to 2 percentage points, results -- whether intentionally or not -- in higher interest rates for legally protected classes of borrowers, such as minorities or women.

The latest study supports that view. “This new research supports the likelihood that dealer practices, such as interest rate markups, have a discriminatory impact on borrowers of color,” it concludes.

NADA retort

Not so, retorts the National Automobile Dealers Association.

NADA criticized the report’s methodology in scathing terms.

The Center for Responsible Lending “advocated eliminating a customer’s ability to negotiate a lower interest rate based on a methodology that is statistically invalid and relies on sample responses where a ‘best guess’ is acceptable,” NADA spokesman Bailey Wood said in a statement.

Some of the questions contained in the telephone survey allowed for respondents to make their “best guess” on numbers from six years earlier.

“The survey ignores credit score,” Wood said in an interview. “Few factors influence an [annual percentage rate] on a loan more than credit score. The survey relies on participants to recall details such as trade-in allowance and down payments for transactions that occurred as long ago as six years.”

He added: “Do you remember six years ago?”

‘Not’ data-driven

For the phone survey, conducted in October 2012, researchers contacted 946 consumers who had purchased a car at a dealership in the prior six years. The Center states in the report that the results “do not necessarily demonstrate discrimination” because the APR analysis does not “hold all factors that may influence interest rate pricing as constant.”

Chris Stinebert, CEO of the American Financial Services Association, a Washington trade group representing lenders, stated in an e-mail that his group is only interested in “data-driven” studies and said that this study “certainly does not fall into that category.”

According to the study, white car buyers are more likely to get better rates on loans from car dealers than African Americans or Latinos, even if they don’t try to haggle the price down.

Attempts to negotiate

The results of the survey show that a larger percentage of African Americans and Latinos attempt to negotiate lower interest rates on loans than white buyers. It found that 39 percent of Latinos and 32 percent of African Americans reported negotiating their interest rate, compared to just 22 percent of white buyers.

Despite negotiating their interest rates less frequently than Latinos or African Americans, white consumers reported receiving lower interest rates.

The report points to “hidden dealer increases” in the interest rate, saying that 74.2 percent of African Americans and 75.2 percent of Latino consumers were unaware of a markup of the dealer interest rate.

According to the report, the average APR for a white consumer when purchasing a new vehicle is 3.68 percent, compared with 4.95 percent for African Americans and 5.36 percent for Latinos. Average APR for a white buyer on a used car is 5.71 percent, compared with 7.51 percent for African Americans and 8.71 percent for Latinos.

‘Best rate’

The survey also found that 47.6 percent of African Americans and 47.8 percent of Latinos reported that they were told the rate they received was the “best rate available.”

The report also stated that 14.0 percent of African Americans and 15.6 percent of Latinos were told that add-ons, such as insurance and extended service contracts, were mandatory purchases.

When contacted for this article, the Consumer Financial Protection Bureau did not comment directly but referred to previous statements made by CFPB Director Richard Cordray on the subject, including, “Consumers should not have to pay more for a car loan simply based on their race.”

You can reach Sean Gagnier at



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