Auto lenders are peppering dealerships with letters that say analyses of the dealerships' practices indicate a pattern of discrimination against minorities, women or the elderly in the loans they arrange for those customers.
Many dealers say they think the letters were prompted by pressure on the lenders by the federal Consumer Financial Protection Bureau and see them as another attempt by the bureau to extend its oversight to dealers. The law that created the bureau in 2010 did not give it jurisdiction over auto dealers.
Dealers, who universally deny discriminating against customers, criticize the methodology used by lenders in alleging discrimination.
Bob Shuman, owner of Shuman Chrysler-Dodge-Jeep-Ram in suburban Detroit, advised fellow dealers "to unscrew yourself from the ceiling after you read the letter and then call a good dealer lawyer for advice as to how to respond."
Shuman, immediate past president of the Detroit Auto Dealers Association, said he has not received a warning letter but has seen similar letters received by other Detroit-area dealers. He predicted more will be coming from other lenders.
Separately, the Consumer Financial Protection Bureau and the U.S. Department of Justice are examining major automakers' captive finance arms for possible discrimination in lending, regulatory filings show.
Toyota Motor Credit Corp. said in a regulatory filing that the bureau and the Justice Department sought information from it "and other auto finance providers" about pricing practices for loans that the company funds for auto dealers. American Honda Finance Corp. reported the same request.
Dealers, lawyers and others who have seen the lenders' letters said they allege patterns of discrimination against several categories of consumers based on race, ethnicity, gender and age. They said the letters started arriving last spring, after the bureau issued guidance to auto lenders in March.
Automotive News has obtained copies of letters sent by Chase Auto Finance and Bank of America. They state that the dealership charged a higher average dealer reserve on loans to protected classes, such as minorities, compared with loans to everyone else.
The Bank of America letter said a review of the dealership's loans purchased by the bank "identified pricing differences for affected groups" that "are not explained by credit-related characteristics." The bank admitted that it likely doesn't finance all of the dealership's customers and therefore sees only part of the dealership's lending patterns. But it added that it will continue to monitor loans, and "if we find similar results, we may take further action, which may include termination of our dealer agreement" or "placing your dealership on a flat fee compensation schedule."
John Hyatt, president of Bank of America Dealer Financial Services, declined to comment.
The dealer reserve is the amount lenders allow dealerships to add to the interest rate on an auto loan, usually 2 percentage points or less, as compensation for arranging the loan. It is a major source of dealership profits.
Based on interviews, there doesn't seem to be any predictable threshold at which a difference in pricing triggers a warning letter.
In one example, a bank sent a letter warning a dealer that the dealer's average reserve for minority borrowers was 0.39 percentage point higher than for nonminority borrowers, said finance and insurance trainer Bob Harkins, vice president of AFG Training Academy of Grapevine, Texas. Harkins said he has seen a total of seven letters from three different lenders. He wouldn't name the dealerships or the lenders.