Structural Racism Flourishes in the Auto Lending Market
Emily Hirtle, Policy Associate, Americans for Financial Reform
In much of America, owning a car is necessary to participate in the economy, and to live a full and vibrant life. However, this ticket to opportunity comes at an increasingly steep price – as of 2021, Americans owe $1.42 trillion in auto loan debt. A recent article from Consumer Reports calls auto-loans “financial sinkholes,” citing that the average monthly new-car loan payment is 25% higher than it was a decade ago. Furthermore, the auto-lending market is riddled with insidious discrimination, and does not provide equal access to this essential product. According to a report by the National Consumer Law Center, auto financing companies charge Black consumers between $300-$500 more in interest rate markups on their auto loans compared to white consumers. The same paper also reports that African American and Latinx consumers who purchased cars in person paid more than other consumers, and that 45% of the difference in price cannot be explained by income, education, or other traits. A study by the National Fair Housing Alliance found that 62.5% of the time, the study’s test borrowers of color who were more qualified than their white counterparts received more costly pricing options from auto dealers, and that these borrowers would have paid $2,662.56 more over the life of their loan than the less-qualified white testers.  In 2013, 2015, and 2016 the CFPB took action against four separate auto lenders for discriminatory lending against African American, Latinx, and API borrowers. In a 2020 lawsuit, the FTC took action against Bronx Honda for instructing salespeople to charge African American and Latinx consumers higher fees. A study from Yale Law School found that Black women were offered markups over three times higher than those offered to white men, a price that the study notes represents greater discrimination than that which was found against white women and Black men combined. Notably, this Yale study is from 1991, and there has been minimal auto-lending research that examines gender disparities since its publication. There should be more research that investigates the intersections of race and gender-based discrimination in the auto-lending market, and auto dealers should be required to report gender, race, and ethnicity data of their borrowers so that we can understand the full extent of this harm. But even with the limited data available, it is clear that racism flourishes in the auto-lending market.
The root of this discrimination lies in the market’s very structure. As Georgetown law professor Adam J. Levitin explains in his scholarship, unlike most regular major purchases, such as a home, automobiles are primarily financed by the seller. This means that consumers often lack alternative financing options, and receive a take-it-or-leave-it financing deal after spending substantial time and energy negotiating the sale of the car, leaving them vulnerable to abuse. Furthermore, the dealer typically assigns the loan to an “indirect lender,” or a financial institution like a bank or a credit union that buys the loan. In the auto-loan market, the indirect lender also allows the dealer to profit off of the loan in the form of a “dealer markup.” A dealer markup is an increased interest rate that the consumer pays on top of the base price of the loan that goes directly to the dealer, and the dealer is also allowed to set the size of the markup on a case-by-case basis. This dealer markup is what makes auto-lending so predatory. The highly-competitive market incentivizes overcharging consumers to maximize profits, and the dealer markup allows auto dealers to charge different prices to different consumers, resulting in Black and Latinx borrowers in particular systemically paying more than their white counterparts.
On top of these already predatory practices, there is also the subprime auto-lending market, which makes over $100 billion a year selling primarily used cars in low-income communities to borrowers who do not qualify for other loans, at exorbitantly high interest rates. The subprime auto market has more than doubled in growth in the wake of the 2008 foreclosure crisis, which left so many borrowers with tarnished credit and little cash to put towards an essential vehicle. Subprime auto lenders charge borrowers upwards 20% interest rates, which is often over triple the rate of prime auto loans, with the highest rates for those who are least able to pay. Notably, subprime loans at “buy-here-pay-here” dealerships are particularly predatory – a recent CFPB report on subprime auto loans found that these lenders on average set almost double the interest rates compared to those set at banks, and also have significantly higher default rates. During the Covid economic crisis, Credit Acceptance, the country’s largest standalone subprime auto lender, only paused credit reporting, late fees, and collection activities for 90 days. Since the federal government provided no direct Covid assistance for auto-loans, after those 3 months Credit Acceptance’s borrowers risked late charges and car repossession as the pandemic continued. Racism flourishes in the subprime auto market as well – as of 2016, at least eight banks had been accused of increasing interest rates for Black and Latinx borrowers. As Senator Elizabeth Warren remarked in a 2015 speech: “The [auto] market is now thick with loose underwriting standards, predatory and discriminatory lending practices, and increasing repossessions.”
With such a predatory structure for such an essential product, the auto-lending market’s discriminatory charging not only contributes to the racial wealth gap, but also disproportionately threatens Black, Latinx, and Asian consumers’ health and well-being. Roughly 2.2 million vehicles are repossessed in the United States each year. For many households, cars are a necessity to access food, medical care, and employment. Without a car, many consumers are left extremely vulnerable, especially Black, Latinx and Asian households, who are more likely to not have access to a car than white households. According to a report by U.S. PIRG Education Fund, generations of public policy dedicating ⅘ of the nation’s transit spending to highway building, as well as the embrace of single-use zoning and sprawl-style development, have created auto dependency. Access to a vehicle is necessary to complete daily tasks, as well as to reach jobs and economic opportunities in most of the nation – even in New York City, the country’s most transit-oriented metropolitan area, only 15% of jobs are accessible within an hour by transit. A study done by the Urban Institute found that housing voucher recipients with cars are more likely to live in neighborhoods with stronger housing markets and lower health risks, and also have better employment outcomes. Additionally, 88% of Americans rely on their car to pick up groceries, and the average household travels 3.79 miles to their primary grocery store. For pregnant people that live in states like Louisiana where there are only three abortion clinics, access to a car can be essential to accessing life-saving reproductive healthcare. Louisiana is also one of the states with the highest auto-loan delinquency rates in the country.
Because of rampant racial discrimination in the auto lending market, Black and Latinx drivers across the United States are forced to pay more for their vehicles. As a result of this inappropriately higher pricing that they may not be able to afford, millions of drivers are left at risk of losing access to employment, groceries, and healthcare. In 2013, the Consumer Financial Protection Bureau issued guidance clarifying that compliance with the Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating on the basis of race and sex, and directed indirect auto lenders to revise or even completely eliminate the dealer markup because of the discriminatory outcomes it produces. Despite clear evidence of persistent discrimination and inequity found in dealer markups, this guidance was overturned by Congress in 2018 under the Trump Administration, allowing dealer markups and other auto lending abuses to continue without much hindrance. Government action is necessary to stamp out discrimination and harmful practices in the auto lending market. That’s why AFR is advocating for the FTC to use its authority to write rules on auto-lending to rein in predatory practices. The FTC should also work together with the CFPB to take action against persistent discrimination the auto lending market. Furthermore, it is essential that we amend ECOA to require the collection and analysis of race and ethnicity data for auto-financing transactions. It is past time our financial regulators take a step toward justice by ending the structural racism that the auto lending market propagates.
 This study also found that Black men were offered markups over twice as high as those offered to white men, and that white women were offered markups 40% higher than those offered to white men.
Being one of the most recent studies that considers gender discrimination in auto-lending, this study has been cited in much more recent scholarship, including the above NCLC study “Time to Stop Racing Cars.”
 For households at or below the poverty line, 31% of Black households, 20% of Latinx households, 22% of Asian households and 13% of white households do not have access to a car. For households above the poverty line, those respective numbers are 9%, 6%, 5%, and 3%.