Republicans and some Democrats in the House of Representatives are fighting regulations that could prevent minorities and women from getting screwed by shady car dealers.
Data scientist and Mathbabe blogger Cathy O'Neil argues HR 1737, a Republican-supported bill that could nullify a Consumer Finance Protection Bureau's bulletin and ultimately aid auto dealers who choose to gouge minority customers with higher financing rates.
The bureau bulletin wass issued in 2013, and provided guidelines for auto lenders to operate their businesses in a way that "complies with the fair lending requirements of the Equal Credit Opportunity Act."
Currently, auto dealers who sell directly to customers are allowed to charge a higher interest rate on loans to customers they deem higher-risk, a common practice known as the dealer markup. Dealers then get a cut of those higher fees from financial services companies indirectly providing the loans.
The Consumer Finance Protection Bureau is a federal agency Congress created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, intended to protect consumers against discriminatory practices in the financial industry. Officials at the bureau are worried the dealer markup may be an easy way for auto dealers to discriminate against minority and female car buyers without regard to their credit scores, with the average cost of such discrimination running $200 to $300 over the course of a loan.
Previous research has shown pricing discrimination is likely systemic within the industry. Since auto industry lobbyists were successful, however, in expressly excluding auto dealerships from the finance protection bureau oversight in Dodd-Frank, the bureau has instead "chosen to target lenders that partner with dealerships," American Banker wrote.
The bureau's 2013 bulletin indicated it would hold lenders responsible "if the lender regularly participates in a credit decision and its policies result in discrimination." It also suggested the industry switch to a flat-fee structure to prevent discrimination, though bureau director Richard Cordray told Congress there were "a number of possible approaches" that could work.
That same year, the bureau successfully reached an $80 million settlement with lender Ally after it found evidence that dealerships tied to the company illegally targeted minorities for higher loan rates, and settled other suits against manufacturers including Honda.
The House bill would force the bureau to retract its 2013 guidelines and implement other obstacles making it harder for the bureau to enforce such regulations.
"It turns out that these fees vary in size and are consistently bigger for blacks and Hispanics," O'Neil wrote. "Which means that if a number of people of different races but a similar credit history walk into a car dealership and buy a car, the minorities will typically end up paying more. This is illegal discrimination under the legal tool called the 'theory of disparate impact.'"
O'Neil said one of the problems with the bureau's approach is that unlike mortgage providers, automotive lenders are not required to keep extensive records on their borrowers. The agency has to estimate discrimination using a variety of secondary tools like demographic data.
The Wall Street Journal's Holman W. Jenkins argued that since the bureau cannot directly measure discrimination, it has been unable to demonstrate a compelling reason for the bureau's oversight of the auto loan industry.
Supposedly this "broken, gap-toothed rake supposedly is a fine enough comb to discover ethnic disparities of between 10 and 30 basis points on an auto loan, or a maximum of 0.3 percentage points," Jenkins wrote. "Current car loan rates range from 2.6% for prime borrowers to 12.7% for bottom-tier subprime. We're talking about disparities that amount to less than 1% of total transaction cost when price, loan terms and options are considered."
Rep. Frank Guinta (R-N.H.), the bill's sponsor, argued that eliminating the dealer markup would reduce flexibility in pricing and ultimately increase the cost of buying a car, which would hurt minority buyers as well.
But O'Neil said that just because the bureau can't measure discrimination due to obstacles supported by the auto industry doesn't mean it isn't going on.
"In terms of how much discrimination is actually going on, I would say that if it's not much, then the banks can certainly afford it more than poor black borrowers can," O'Neil wrote in an email to Mic. "And they might just want to fix their process once and for all and be done with it. In other words, it's not a convincing argument.
"Also there are plenty of other sources of discrimination that aren't part of this suit which focuses on dealer markups, for example, negotiating price. So I am sure they are focusing on this because they don't want the entire process to be audited."
Further hinting at the GOP's general disdain for the existence of the bureau is an attack ad that ran during Tuesday night's Republican debate on Fox Business Network, paid for by a self-described "center-right" group.