Courtesy Everett Collection
One way to get a better loan on the car you’re buying? Being white.
Car dealerships discriminate against nonwhite buyers, according to a new report from the National Fair Housing Alliance, a Washington, D.C.-based nonprofit that advocates against housing discrimination.
The alliance sent 16 “testers” into eight franchised car dealerships in Virginia, between fall 2016 and spring 2017. The testers were paired up into teams — one white, one nonwhite — and visited the same dealership within 24 hours of one another. They all asked about buying the same 2017 car and with the same identification number. They visited the dealership alone and did not tell the dealership about their fellow “tester.”
In 5 of 8 tests, the nonwhite testers who were more creditworthy than their white partner were given more expensive financing options.
In every pair, the nonwhite person visiting the dealership was more creditworthy, the Alliance said, based on factors including their credit history, FICO credit score and debt to income ratio.
The white and nonwhite testers were matched in their pairs based on their gender and age and had credit scores in close range, with the nonwhite tester’s being higher. In seven of the eight pairs, the nonwhite tester had a higher income.
And yet in five of the eight tests, the nonwhite testers who were more creditworthy than their white partner were given more expensive financing options.
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The nonwhite testers would have paid more than $2,600 more over the life of the loan than the white testers in those cases. And 75% of the time, the white testers were offered a greater variety of financing options than nonwhite testers.
Higher auto loan interest rates can make some vehicles prohibitively expensive
Seemingly small differences in auto loan interest rates can have dire consequences down the road, especially for subprime borrowers who may not have the funds to spare on higher interest rates. Being unable to pay car payments sometimes leads consumers to financial consequences, including missing bill payments that can make their credit scores worse.
What’s more, cars are one of the largest purchases a family will make, the Alliance said, and they are often necessary for consumers who live far from their jobs. Americans owe more than $1.2 trillion in auto loans , according to the Federal Reserve Bank of New York. Nearly a quarter of the adults the Federal Reserve surveyed in 2016 said they or their spouse purchased or leased a new or used vehicle in the last year.
That is a small sample size from which to draw conclusions, a spokesman for the National Automobile Dealers Association (NADA), a trade group, said. “Every customer deserves to be treated fairly, and there is no place for discrimination in auto lending or sales,” he said. “However, it is highly irresponsible to draw conclusions from a study based on a total of eight interactions that did not even lead to sales in a market where 17 million actual sales occur each year.”
Other reports found auto dealers have different pricing for different races
But this is one of many studies in recent years that have highlighted discrimination in auto sales. Last October, the National Consumer Law Center said that many “add-ons” targeted Hispanic buyers more than any other race. The add-ons include service contracts, guaranteed asset protection (GAP) insurance, and window etching, make up a large share of dealers’ profits. “These abuses, damaging enough in themselves, set in place a chain of other consequences for consumers,” it said. “The expensive add-ons increase the price of cars, putting them out of reach for some consumers.”
That report analyzed a national data set of three million add-on products sold from September 2009 through June 2015. One customer in Kentucky who paid $299 for window etching never knew that another customer at the same dealership paid $1 for the same product. (The report used a list of Hispanic surnames created by the Federal Reserve Board’s Office of Fair Lending Enforcement based on the U.S. Census identification of common Spanish surnames.)
In 2015, the U.S. Department of Justice and the Consumer Financial Protection Bureau settled a discriminatory lawsuit with Honda, alleging it “engaged in a pattern or practice of discrimination against African-American, Hispanic and Asian/Pacific Islander borrowers in auto lending.” In addition to the $24 million in payments, Honda agreed to pay $1 million to fund a consumer financial education program focused on consumer auto finance that is designed to benefit African-American, Hispanic and Asian/Pacific Islander populations. (Honda was not immediately available for comment.)
The Department of Justice fined banks for discrimination
Lenders in other industries have been accused of discriminating against nonwhite borrowers. J.P. Morgan /zigman2/quotes/205971034/composite JPM +2.53% Chase & Co. settled with the Department of Justice in 2017 for $55 million , over allegations their independent brokers discriminated against nonwhite customers who were seeking mortgages.
Former U.S. Attorney Preet Bharara filed a complaint that said J.P. Morgan charged African-American and Hispanic borrowers higher rates than white borrowers from 2006 to 2009, which would violate the Fair Housing Act. The bank denied wrongdoing.
The Consumer Financial Protection Bureau has also investigated discrimination in auto financing, and fined Ally Bank /zigman2/quotes/206227672/composite ALLY +4.11% and American Honda Finance Corp, two lenders, for restitution to borrowers in 2013. But NADA struck back and said the CFPB’s methodology contained errors.
Consumer advocates say discrimination in retail sales persists
Several consumer groups said the Alliance’s latest report provides evidence of a problem that has existed for a long time. “We commend NFHA for their incredible work and urge lawmakers at the state and federal level to use their power to fight against this type of unlawful discrimination and financial abuse,” said Mike Calhoun, the president of the Center for Responsible Lending, a nonprofit based in Durham, N.C.
NFHA’s investigation provides yet more evidence of what civil rights and consumer advocacy organizations have been saying all along,” said Vanita Gupta, the president and CEO of The Leadership Conference on Civil and Human Rights, an organization made up of various civil rights interest groups, based in Washington, D.C. “Racial discrimination still exists in the consumer finance industry.”
Many consumers, regardless of their race, aren’t getting the best rates. A majority of consumers who are buying new cars do not shop around for the best rates , and as a result, buy lower-quality cars, or pay more interest than they need to, according to an analysis by researchers at MIT’s Sloan School of Management and Brigham Young’s Marriott School of Business.