Discrimination when buying a car - National Fair Housing Alliance

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Founded in 1988 and headquartered in Washington, DC, the National Fair Housing Alliance (NFHA) is the only national organization dedicated solely to ending discrmination in housing. NFHA is the voice of fair housing. NFHA works to eliminate housing discrimination and to ensure equal housing opportunity for all people through leadership, education, outreach, membership services, public policy initiatives, community development, advocacy, and enforcement.

NFHA is a consortium of more than 220 private, nonprofit fair housing organizations, state and local civil rights agencies, and individuals from throughout the United States. NFHA recognizes the importance of home as a component of the American Dream and aids in the creation of diverse, barrier-free communities throughout the nation.

Authors: Lisa Rice Erich Schwartz Jr.

Research and Analysis: Shivaughn Ferguson

Copyright ? January 2018. Please contact the National Fair Housing Alliance for permission to reproduce any of the information, including graphics, in this report.


NFHA would like to thank HOME of Virginia (Richmond, VA) and the Equal Rights Center (Washington, DC) for their assistance with recruiting testers and/or providing space for the coordination of the tests that comprised the investigation described in this report.

Support for the investigation that serves as the basis of this report was provided in part by the Center for Responsible Lending (CRL). The authors and publisher are solely responsible for the accuracy, interpretations, and recommendations contained in this publication. Such interpretations do not necessarily reflect the views of CRL. NFHA also utilized its own resources to support the completion of the investigation that serves as the basis for this report and for production of this report. Funders do not determine investigation design, methodology, coordination, analysis, findings, insights, or recommendations of the National Fair Housing Alliance.


Executive Summary


Section I: Background


1.1 History of Discrimination in Auto Lending


1.2 Why This Matters for Fair Housing Advocates


1.3 Relevant Laws


Section II: Methodology


Section III: Testing Outcomes and Findings


3.1 Discriminatory Treatment when Obtaining an Auto Loan


3.2 General Challenges to Obtaining an Auto Loan


Section IV: Recommendations


APPENDIX: Summary Charts for Each Paired Test


Discrimination in Auto Lending | 3


Transportation is all about connecting people to the places they need to go--work, school, the grocery store, recreation, places of worship, the library, the bank, the doctor, or elsewhere. Some people may live in high opportunity neighborhoods, where all of these amenities exist within walking distance, but most of us require some other form of transportation at least some of the time. Public transportation can be a great way to connect people to opportunity, but it must be accessible, reliable, and affordable. In many communities, people cannot depend on public transportation to get them where they need to go. In order to access opportunity, these people must have their own transportation--usually an automobile. Too often, the people in this situation are people of color, whose neighborhoods have been starved of investment and whose ability to move to neighborhoods that better connect them to opportunity has been constrained by discriminatory policies and practices. And too often, when they seek a loan to finance an auto purchase, they face discrimination again.

Auto loans are the third most prevalent form of debt among U.S. residents after home and student loans, and over three-fourths of new cars are purchased using an auto loan.1 However, several studies (detailed further in Section II of this report) have uncovered widespread discrimination in the auto loan industry. As do other forms of lending discrimination, auto lending discrimination has broad implications. This discrimination has undoubtedly played a part in creating the racial and ethnic wealth gaps and credit access disparities that exist in the U.S. today, and it will ensure that they persist if allowed to continue unchecked.

The National Fair Housing Alliance (NFHA) has decades of experience in assessing the ability of people to access lending products and services in a non-discriminatory manner. This work has been primarily concentrated on access to mortgage lending. In 2016, NFHA expanded its lending analysis to explore how well people are able to access auto loans without the hurdles and higher costs of discrimination. NFHA modeled this investigation after a proven methodology used in the mortgage lending arena called matched pair testing to determine whether barriers exist in auto lending that would have deleterious effects on consumers.

In order to ascertain the difference in treatment between White and Non-White customers at car dealerships, NFHA sent eight pairs of testers, one White and one Non-White, to car dealerships in Virginia to inquire about purchasing the same vehicle. Testers are like secret shoppers, and they are instructed to inquire about the same product and then document what they are told and observe. The testers in each pair were similarly situated, matched on gender, and fell within the same age bracket. In seven out of the eight tests, the Non-White tester had a higher income. In the eighth test, though the Non-White tester had a lower income, her debt-to-income ratio was much better than that of the White tester. The Non-White tester's credit score was higher than the White tester's credit score in all cases.

1 Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit (November 2015), medialibrary/interactives/householdcredit/data/pdf/HHDC_2015Q3.pdf.

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All testers, regardless of race, encountered a number of challenges to obtaining the concrete information needed to obtain the best auto loan option available to them. However, the investigation found that Non-White testers were treated considerably worse and received a higher quote for the financing of the exact same vehicle far more often than their White counterparts, despite being better qualified. Overall, this investigation found that, when auto dealers have pricing elements at their discretion, there is an opportunity for discrimination to occur. This investigation revealed that, more often than not, auto dealers took that opportunity to discriminate. Key findings include the following:

? 62.5 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.

? 75 percent of the time, White testers were offered more financing options than NonWhite testers.

? Dealers offered to help bring down interest rates and car prices using incentives and rebates or by making phone calls to personal contacts for White testers more often than they did for Non-White testers.

In addition to the pricing differences above, Non-White testers were subject to dismissive and disrespectful treatment more frequently than White testers. Such high rates of discriminatory treatment are alarming and extremely rare in similar audit-style investigations conducted in the mortgage lending industry. Although it has its bad actors, the mortgage lending industry has been regulated and monitored for civil rights violations for decades. It is imperative that auto lending regulations, particularly those that are designed to fight discrimination, are similarly robust and regularly enforced.

62.5 %


of the time, better qualified Non-White testers received

more costly pricing options than their White


Non-White testers

75% percent of the

who were subject

time, White testers

to discrimination

were offered more

would have paid

financing options than

$2,662.56 more over

Non-white testers

the life of their loan

as compared to less-

qualified White testersDiscrimination in Auto Lending | 5


Auto financing is an issue that affects nearly every American. More than 90 percent of American households own a vehicle.2 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.3 Consumers finance 85.2 percent of new vehicle purchases and 53.5 percent of used vehicle purchases.4 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.5 This investigation focused primarily on indirect lending.

In direct lending, consumers apply for and obtain loans directly from a credit union, bank, or other lending institution. These lending institutions are not directly tied to any car dealership but offer auto loans to customers, thereby circumventing the auto-financing process at the car dealership. Consumers financing their car through direct lending options will receive an interest rate quote from a lending institution. This gives them the advantage of comparing interest rates and loan terms from several lending institutions and provides an opportunity for consumers to shop around for the lowest interest rate and best loan terms available. Once they enter into a contract to purchase a vehicle at a dealership, consumers can use the loan from the direct lender to pay for the vehicle.

In indirect lending, consumers obtain auto financing at a car dealership when they purchase the vehicle. Dealerships participate in loan programs with multiple lenders. These lenders authorize the dealerships to offer loans on their behalf and provide relevant financial information to customers that are approved for loans. Lenders often compensate dealerships for approved loans, meaning both dealerships and lenders benefit from indirect lending. When a consumer is seeking financing at a dealership, the dealership collects basic financial information on the applicant and generally forwards that information to prospective auto lenders. The lending institutions evaluate the information forwarded to them by the dealership and determine whether or not they are willing to extend credit to the applicant. Indirect lending occurs in two forms: the dealership originates loans to consumers which lenders then purchase, or the dealerships forward the loan application to a lender, who then originates the loan. Industry sources indicate that one-third to more than one-half of car buyers use dealer financing.6 7

2 U.S. Census Bureau, Selected Housing Characteristics (2015), Available online at: . xhtml?pid=ACS_15_5YR_DP04&prodType=table. 3 Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit (November 2015), medialibrary/interactives/householdcredit/data/pdf/HHDC_2015Q3.pdf. 4 Experian Information Solutions, Inc., State of Automotive Finance Market (2017), . 5 When consumers lease an automobile, they do not own the car but have agreed to use it (lease it) for a certain number of months. Consumers must return the vehicle when the lease ends, at which point they may have the option of purchasing the vehicle. At "Buy Here Pay Here" dealerships, auto financing is obtained directly from the dealership with no involvement of an outside lending institution. Consumers with bad or non-existent credit typically use "Buy Here Pay Here" financing. Interest rates on loans extended under this category are much higher than they are on loans offered from other lending institutions. The vehicles sold at "Buy Here Pay Here" dealerships typically have thousands of miles on them and in some cases come equipped with a GPS tracker, so the dealerships may repossess the vehicles if the customers default on their loans. Neither leasing nor "Buy Here Pay Here" dealerships were included in the investigation described in this report. 6 Davis, Delvin, The State of Lending in America & its Impact on U.S. Households: Auto Loans (December 2012). Available online at: . org/state-of-lending/reports/4-Auto-Loans.pdf. 7 .

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In indirect lending scenarios, consumers submit standard financial information to the dealership, including income, debt, monthly rent payments, and an authorization for the dealer to check their current credit score. The dealer then determines the consumer's cost to secure a loan known as an annual percentage rate (APR). A consumer's APR on an auto loan consists of two factors: the "buy rate" and the "dealer reserve." The buy rate is a rate determined by lending institutions through automated computer algorithms. The buy rate is based entirely on credit and risk factors and is typically generated for the dealers by the lending institutions instantaneously upon receiving the consumer's financial information. The buy rate is the minimum interest rate given to a dealer by a lending institution; it represents the lender's "OK" to give the consumer a loan at that rate.

The second factor of the APR--the dealer reserve or "markup"--increases the final interest rate offered to the consumer. The dealer reserve is entirely up to the discretion of the dealer and is not based on the consumer's financial profile or their risk of defaulting on the loan. Lending institutions typically send the profits earned from dealer's reserves to the dealers as commissions--essentially extra profit on the sale. The buy rate is the lowest interest rate a dealership has been authorized to offer. When dealers refer to any interest rate higher than the buy rate as the lowest interest rate they can offer, they are misleading the borrower.

I.1 History of Discrimination in Auto Lending

There is an 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 NonWhite car purchasers often received unfair dealer markups on auto loans, Yale Law Professor Ian Ayres was the first researcher to demonstrate that this was actually the case. He conducted his study in 1991 by sending testers of various races and ethnicities to new car dealerships in Chicago and found that Black male testers were asked to pay more than twice the markup of White male testers.8 He conducted another study in 1994 in order 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 to testers of other races and ethnicities.9

In 2003, Vanderbilt Business Professor Mark A. Cohen released a study that was much broader in scale than the Ayres' study. In his study, Cohen investigated more than 1.5 million General Motors Acceptance Corporation ("GMAC") loans made between 1999 and 2003. Cohen found that Black customers were three times as likely as equally qualified White customers to be charged an interest rate markup on their loans financed by GMAC.10 According to the study, racial discrimination in auto lending was a national phenomenon that occurred rampantly, regardless of the profession of

8 Ayres, Ian, Fair Driving: Gender and Race Discrimination in Retail Car Negotiations (1991). Faculty Scholarship Series. 1540. Available Online at: . 9 Ayres, Ian, "Further Evidence of Discrimination in New Car Negotiations and Estimates of Its Cause" (1995). Faculty Scholarship Series 1523. Available online at: . 10 Mark A. Cohen, Report on the Racial Impact of GMAC's Finance Charge Markup Policy, 2003.

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the customer or the model of the car purchased. Black borrowers paid an average of $362 more than White borrowers in extra interest over the life of a loan. Even Black GMAC employees paid more on loans than their White counterparts. Cohen's report claimed that GMAC borrowers were charged almost $422 million in subjective markups and that Black borrowers paid nearly 20 percent of this, despite only representing 8.5 percent of all borrowers. In addition to discriminatory interest rates, Cohen also found a discriminatory difference in treatment. Black borrowers were much less likely to be offered preferential interest rates, special financing incentives, or rebates. Black college graduates were less likely to be offered below-market interest rates on special loans designed for recent college graduates. After numerous statistical tests, he concluded that the higher interest rates charged to Black customers could not be explained by creditworthiness or other legitimate business factors.

In the late 1990's, the National Consumer Law Center (NCLC) co-counseled class action lawsuits against the major auto finance companies (Toyota Motor Credit Corp, Daimler Chrysler Financial, Ford Motor Credit Company, General Motors Acceptance Corporation, Nissan Motors Acceptance Corporation, American Honda Finance Corporation, and Primus Automotive Financial Services) because of their use of discretionary markups. NCLC hired an expert witness to match data on auto loans obtained in discovery and matched this data to driver's license data from states that collected drivers' race. They analyzed millions of loans and were able to identify the race of many borrowers using this methodology. They were also able to identify the race of customers who financed a car in a state that did not collect racial information, but who had previously resided in a state that did. They found that dealerships were twice as likely to add an interest rate markup to loans obtained by Black consumers as they were to loans obtained by similarly situated White borrowers. In cases where both loans were marked up, Black borrowers paid significantly more. Statistically significant racial disparities were observed in every region of the United States and in every state in which sufficient data was available. All of the auto lending institutions named in the class action suits settled, paying millions of dollars and agreeing to cap discretionary markup rates for at least five years.11

Recently, both the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) concluded that car dealerships' practice of marking up interest rates for auto loans results in discrimination for minority buyers. The CFPB and DOJ conducted proxy analysis on data from millions of auto finance transactions. They use a method called the Bayesian Improved Surname Geocoding System (BISG), which integrates both surname analysis and geographical analysis, using the U.S. Census Bureau data from 2000 in order to calculate a single proxy probability for race and ethnicity.12 From 2013 to 2016, Ally Bank and Ally Financial Services (formerly GMAC),13 American Honda Finance Corporation,14 Fifth Third Bank,15 and Toyota Motor Credit

11 National Consumer Law Center et al., Comments to the CFPB (May 4, 2017). Available online at: . 12 (pp. 5-6), Analysis is also described in the following document: . 13 . 14 . 15 .

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