The Final Call

Racism in car buying?

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For two years Jason saved and worked on raising his credit score to buy the car of his dreams.  He wanted a luxury sports car. He had a good job, money in the bank and the means of paying the note. Car insurance would not be a problem. He had researched dealers, narrowed his choices and was ready to go. He made an appointment and walked into the show room.

He left with the car of his dreams and what he thought was a great interest rate. Maybe a little higher than he expected considering his 685 credit score but he got the car he wanted, and he left happy.  As many know, ignorance is bliss.

Chances are, according to a new investigative report by the National Fair Housing Alliance on racial discrimination in the auto lending industry, not only did Jason not get the best interest rate, he likely joined Blacks around the country who are discriminated against when they try to buy a car.

NFHA found that more than half the time White borrowers with weaker credit profiles received less expensive financing options and more favorable treatment than their non-White counterparts who were more financially qualified.

“This report is disheartening but not surprising. Years of data show that unfair, racially discriminatory treatment of consumers is a growing problem in the auto lending industry. This is especially true for low-income families of color, where a car is often one of the biggest purchases made by a household,” said Mike Calhoun, president of the Center for Responsible Lending.

NFHA sent eight pairs of testers, one White and one non-White, to car dealerships in the Commonwealth of Virginia to inquire about purchasing the same vehicle. Testers, like secret shoppers, were instructed to inquire about the same product and then document what they were told and observed.

The tester pairs matched in nearly every way with the exception that the non-White tester was always more financially qualified than the White tester. While all customers received some level of undesirable treatment, non-White testers received considerably worse treatment and were significantly more likely to receive a higher quote for the financing of the exact same vehicle, despite being better qualified financially.

Among key facts in the report:

· Just over 62 percent of the time, non-White testers who were more qualified than their White counterparts received more costly pricing options.

· On average, non-White testers who experienced discrimination would have paid an average of $2,662.56 more over the life of the loan than less-qualified White testers.

· Seventy-five percent of the time, White testers were offered more financing options than non-White testers.

“Achieving economic parity is a core goal for the National Urban League. These research findings are yet another unfortunate example that our work must remain vigilant if we are to truly attain equity. Charging people of color higher prices on a major consumer purchase is not only illegal, but outrageous and must be stopped,” said Marc Morial, president and CEO of the National Urban League.

According to the report, auto financing is an issue that affects nearly every American. More than 90 percent of American households own a vehicle. Automobile lending is the third largest category of household debt in America, behind mortgages and student loans, with almost 100 million auto loans totaling over $1 trillion in the U.S. economy.

Consumers finance 85.2 percent of new vehicle purchases and 53.5 percent of used vehicle purchases. There are multiple routes through which a consumer can obtain financing on a vehicle. The two primary methods of obtaining financing to purchase a vehicle are direct lending and indirect lending. Other, less-common, options for auto financing are leasing a vehicle and “Buy Here Pay Here” car dealerships. This investigation focused primarily on indirect lending.

The report detailed the extensive history of discrimination in the auto lending industry, and much of it is attributed to unfair dealer markups on auto loans. Though it was suspected for decades that non-White car purchasers often received unfair dealer markups on auto loans, Yale law professor Ian Ayres was the first researcher to demonstrate this was actually the case.

He conducted a study in 1991 by sending testers of various races and ethnicities to new car dealerships in Chicago and found Black male testers were asked to pay more than twice the markup of White male testers. 

Professor Ayres conducted another study in 1994 to test the results of his original study, correcting for weaknesses in the original methodology, and used a new quantitative method of identifying the causes of discrimination. The results from this second investigation mirrored the first. It was clear that auto dealers systematically offered lower prices to White testers than testers of other races and ethnicities.

“NFHA’s investigation provides yet more evidence—and simple enough that anyone should be able to comprehend it—of what civil rights and consumer advocacy organizations have been saying all along: racial discrimination still exists in the consumer finance industry, and we still need vigorous enforcement of civil rights laws to combat it,” said Vanita Gupta of the Leadership Conference on Civil and Human Rights.

“As President Trump and his allies continue trying to gut the Consumer Financial Protection Bureau, which already has only narrow authority under the law to address auto loan discrimination, they would be wise to read this report so they can see just where their deregulatory agenda would take us.”