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CFPB provides fair lending guidance to auto lenders

CFPB_LogoThe CFPB released a bulletin last week that states that certain auto lenders are responsible for discriminatory pricing schemes, providing guidance to auto lenders under the agency’s authority on how to address fair lending issues.

“Consumers should not have to pay more for a car loan simply based on their race,” CFPB Director Richard Cordray said. “Today’s bulletin clarifies our authority to pursue auto lenders whose policies harm consumers through unlawful discrimination.”

When a consumer requests financing through an auto dealership, the dealer generally arranges the financing through a third party, which then provides the dealer with an interest rate it will accept for a potential customer. In the practice of “dealer markup,” however, the dealer is authorized to charge a higher interest rate to the consumer than originally provided by the lender, and the lender then shares in part of the profit.

The CFPB said “research indicates that markup practices may lead to African Americans and Hispanics being charged higher markups than other, similarly situated, white consumers.”

The bulletin provides guidance for indirect auto lenders on methods that could be used to limit fair lending risk under the Equal Credit Opportunity Act, which prohibits credit discrimination based on race, color, nationality, marital status, sex and age.

Additionally, the CFPB bulletin recommends that indirect auto lenders take steps to ensure they are in compliance with fair lending laws, including “imposing controls on dealer markup, monitoring and addressing the effects of markup policies as part of a robust fair lending compliance program and eliminating dealer discretion to markup buy rates and fairly compensating dealers using a different mechanism that does not result in discrimination.”

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