As part of a broad deregulation agenda, Republicans in the U.S. Senate overturned a 2013 Obama-era rule issued by the Consumer Financial Protection Bureau designed to protect consumers from racial discrimination by auto lenders. (photo: Wikimedia Commons)
The Republican Party policies of financial deregulation and rollback of civil rights enforcement have come together, as the U.S. Senate gives the green light for auto lenders to racially discriminate against Black and Latino consumers with more expensive loans.
In a vote on party lines, Republicans led by Sen. Pat Toomey of Pennsylvania, with the aid of one Democrat — Sen. Joe Manchin of West Virginia — made use of the Congressional Review Act to overturn an Obama-era rule issued by the Consumer Financial Protection Bureau (CFPB). Issued in 2013, the guidance from the Obama administration explained that some car lenders that offer financing through dealerships engage in illegal and discriminatory markups that harm consumers and cost them tens of millions of dollars each year.
Dealers often secure auto financing for customers through indirect third-party auto lenders. These lenders may allow dealers to charge consumers a higher interest rate than the lender provided to the dealer. This “dealer markup” is a cost to the borrower and a revenue-sharing scheme between the finance company and the dealer. This allows the dealer to make a profit, charge different rates to different customers regardless of their credit score and gives the dealer the discretion to potentially charge African-Americans and Latinos higher rates than their white counterparts.
“The CFPB recommends that indirect auto lenders take steps to ensure that they are operating in compliance with fair lending laws as applied to dealer markup and compensation policies. These steps may include, but are not limited to: Imposing controls on dealer markup, or otherwise revising dealer markup policies; Monitoring and addressing the effects of markup policies as part of a robust fair lending compliance program; Eliminating dealer discretion to mark up buy rates, and fairly compensating dealers using a different mechanism that does not result in discrimination, such as flat fees per transaction,” the agency said in a bulletin on compliance with the Equal Credit Opportunity Act.
Enacted in 1974, the ECOA makes it illegal for a creditor to discriminate in a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, public assistance status, or exercising a right under the Consumer Credit Protection Act.
At the time of the Obama-era rules in 2012, there was $783 billion in outstanding auto loan debt and 15.7 million consumer auto loans, making car loans the third-largest source of outstanding household debt after mortgages and student loans — more than credit cards. The CFPB was instrumental in securing a $98 million settlement from Ally Bank, settling claims the financial institution discriminated against minority borrowers by charging them more than white customers through car dealers. In 2015, American Honda Finance Corporation paid $24 million in restitution to thousands of Black, Latino and Asian borrowers who paid higher interest rates regardless of creditworthiness. Fifth Third Bank paid $18 million to African-American and Hispanic auto loan borrowers the company overcharged, and $3 million to credit card borrowers who were swindled with deceptive add-on products. In protest of these multimillion-dollar settlements, Republicans claimed the CFPB used “junk science” to argue that finance companies racially discriminated against car buyers.
A 2018 report from the National Fair Housing Alliance, “Discrimination When Buying a Car: How The Color of Your Skin Can Affect Your Car-Shopping Experience,” detailed the racism that takes place in car dealerships. Using white and more creditworthy nonwhite testers going into franchised dealerships to purchase a vehicle, the study found that 62.5 percent of non-white testers with better credit received more costly pricing options than whites. Nonwhite testers would have paid an average of $2,662.56 more for a car than their less-creditworthy white counterparts, and white testers received more financing options 75 percent of the time.
“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,” the report said. “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,” the report added, calling for strong anti-discrimination enforcement in the auto lending industry on par with regulation and monitoring in the mortgage lending sector, which, despite its problems, has taken place for decades.
Republicans have railed against regulation of the financial sector, and the Trump administration has undermined the CFPB — a consumer watchdog agency formed in 2010 under the Dodd-Frank Act to protect consumers against financial predators, and attacked by conservatives as too aggressive — by stripping it of its enforcement power. After White House Budget Director Mick Mulvaney came in to serve as acting head of the bureau, he gutted the office’s Office of Fair Lending and Equal Opportunity, which pursues discrimination cases, dropped a lawsuit against payday lenders, and added the addressing of “outdated, unnecessary, or unduly burdensome regulations” to the CFPB mission statement. Mulvaney denies he is trying to destroy the bureau, but as a congressman, he referred to it as a “joke” and called for its abolition.
“We had a hierarchy in my office in Congress: If you were a lobbyist who never gave us money, I didn’t talk to you. If you’re a lobbyist who gave us money, I might talk to you,” Mulvaney, who is charged with overseeing the banking industry, recently said in an apparent reference to “pay-to-play” and political favors as he addressed the American Bankers Association. “If you came from back home and sat in my lobby, I talked to you without exception, regardless of financial contributions.”
In his first report to Congress in April, Mulvaney called on lawmakers to cripple the agency, claiming the CFPB is “far too powerful, and with precious little oversight of its activities.” Federal appeals judges in the District of Columbia have signaled they could remove him as acting director.
In rescinding the Obama rules on racial discrimination, Republicans invoked the Congressional Review Act, a 1996 law giving Congress broad powers to invalidate rules emanating from federal agencies, and making it a challenge for subsequent administrations to revisit policies the legislators have struck down. GOP lawmakers are using the law to not only invalidate the Obama legacy — including 14 rules his administration enacted in its final days, mostly related to the environment — but potentially to nullify any rule going back decades before the act was passed.
The rollback of consumer protections against racial discrimination is but one part of the Republican strategy of deregulation, but one which some Democrats are participating. In March, with the help of 16 Democrats — including Hillary Clinton running mate Tim Kaine of Virginia, and the recently elected Doug Jones of Alabama — the Senate passed the Economic Growth, Regulatory Relief and Consumer Protection Act. The legislation rolls back some of the Dodd-Frank Wall Street Reform and Consumer Protection Act and, among other things, exempts 85 percent of mortgage lenders from federal reporting requirements designed to monitor discriminatory and predatory financial practices, and exempts 26 of the 38 largest banks from stronger monitoring. The law also increases the chances of racial bias in lending by raising the limit on the number of mortgages a bank may issue before reporting on their terms and who received them from 50 to 500.
