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Car Dealers Charge Exorbitant Interest Rates

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Charlene Crowell

By Charlene Crowell
NNPA Columnist

 

Car lending is on the rise, and rising with it is a hidden, unfair, abusive and discriminatory practice: car dealer interest rate markups. Surveys show that at least two-thirds of Americans have no idea it happens.

A decade ago, the largest auto finance companies settled landmark cases alleging discrimination in auto lending. Recent enforcement actions suggest that discrimination and unfairness still exist in the auto lending market.

Since 80 percent of the cars financed in the U.S. are financed through the dealer, this hidden practice is a huge threat to consumers.

Just this week, Honda Finance Corporation (HFC) agreed to pay $24 million in restitution to borrowers of color as a part of a settlement with the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ), after investigators discovered HFC’s policy to allow dealers to mark up the interest rate resulted in borrowers of color paying more in interest than White borrowers.

Unfortunately, Honda’s discriminatory auto practices are not an isolated incident.

An earlier settlement that CFPB and DOJ’ reached with Ally Bank, in which Ally agreed to pay $98 million in civil penalties and restitution, to settle claims of discrimination. Black, Latino and Asian American car buyers who financed with Ally paid more in interest on their loans than similarly situated White borrowers because of car dealer interest rate markups.

In September, CFPB revealed that several lenders agreed to pay more than $50 million in fines and restitution because supervisory examinations revealed issues of discrimination. And, a recent settlement between the DOJ and Evergreen Bank found similar disparities in Evergreen’s motorcycle lending portfolio, also attributable to dealer interest rate markups.

Consumer advocates welcomed the enforcement actions but cautioned that more work still needs to be done.

“We continue to believe that the only effective way to completely eliminate the discriminatory impact and the unfairness of hidden dealer interest rate markups is to end the practice altogether,” said Chris Kukla, CRL Senior Vice President. “This is a step in the right direction and we urge the CFPB and DOJ to continue pursuing the remaining cases.”

Kukla continued, “However dealer interest rate markups remain an unfair and hidden practice with continued potential for discrimination. CFPB and DOJ must vigilantly monitor the data for discriminatory or unfair impact and act swiftly if and when that impact occurs.”

For the moment, however, Richard Cordray, CFPB’s director will mark the progress made as the journey towards fair lending continues.

“Honda’s proactive decision to move to a new pricing and compensation system demonstrates industry leadership and represents a significant step towards protecting consumers from discrimination,” observed Cordray.

Dealer interest rate mark-up is the practice of adding extra interest to a consumer’s loan–dealers pocket this difference as compensation.

How does it work in practice?

A borrower qualifies for a loan at 5 percent, but the dealer raises it by as much as 2.5 percent more. The dealer tells the consumer, “Great news! We got you a great rate of 7.5 percent!”  The dealer then collects a large bonus payment, up to a thousand dollars or more, when it sells the loan to a lender. The borrower gets stuck with higher car payments for the life of the loan.
Research, court cases and enforcement actions have shown that consumers of color have their loans marked-up more often, and by a greater amount, than White borrowers with similar credit profiles. Data from a series of court cases settled a decade ago found that African American and Latino borrowers were twice as likely to be hit with a dealer interest rate markup, and that markup was on average twice as large as for a similarly-situated white borrower.  Those lenders agreed to cap the amount of markup dealers could add to the interest rate for 10 years, and those agreements have all expired.

Additional CRL research showed that for borrowers of color, following the auto dealers’ own advice on avoiding paying too much in markup does work. Car dealers insist that the interest rate is also negotiable, and that if consumers negotiate the rate like they do the price of the car the threat of overcharge disappears.

CRL data refutes that. According to a CRL-sponsored survey, borrowers of color reported attempting to negotiate the interest rate as much, if not more often, than white borrowers, and yet paid higher interest rates than similarly situated white borrowers. In fact, borrowers of color who negotiated the interest rate paid more than White borrower who did not negotiate.

Media accounts suggest that the CFPB and DOJ are working on several more cases alleging discrimination, and other bank regulators are also referring cases to the DOJ. A host of other enforcement agencies have also launched investigations into auto lending, including whether dealer markups have a discriminatory impact. A similar practice was banned in the mortgage market; it is long past time to end the same practice in the auto lending market.

Even though every forward stride deserves its own acknowledgement, the car lending market still lacks transparency and fairness for many consumers. Dealer interest rate markups are unfair and discriminatory, and we should not tolerate hidden fees that result in unfairness and discrimination in any financial marketplace.

Here’s hoping that car sales will soon be more broadly and fairly transacted for everyone.

 

Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.

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Activism

Oakland Post Endorses Barbara Lee

Barbara Lee will be able to unify the city around Oakland’s critical budget and financial issues, since she will walk into the mayor’s office with the support of a super majority of seven city council members — enabling her to achieve much-needed consensus on moving Oakland into a successful future.

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Congresswoman Barbara Lee. Courtesy photo, Office of Rep. Barbara Lee.
Former Congresswoman Barbara Lee. Courtesy photo.

As we end the celebration of Women’s History Month in Oakland, we endorse Barbara Lee, a woman of demonstrated historical significance. In our opinion, she has the best chance of uniting the city and achieving our needs for affordable housing, public safety, and fiscal accountability.

As a former small business owner, Barbara Lee understands how to apply tools needed to revitalize Oakland’s downtown, uptown, and neighborhood businesses.

Barbara Lee will be able to unify the city around Oakland’s critical budget and financial issues, since she will walk into the mayor’s office with the support of a super majority of seven city council members — enabling her to achieve much-needed consensus on moving Oakland into a successful future.

It is notable that many of those who fought politically on both sides of the recent recall election battles have now laid down their weapons and become brothers and sisters in support of Barbara Lee. The Oakland Post is pleased to join them.

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Activism

Actor, Philanthropist Blair Underwood Visits Bay Area, Kicks Off Literacy Program in ‘New Oakland’ Initiative

These community activations were coordinated with the San Francisco-based non-profit program “Room to Read.” Ray said he is also donating his time to read and take pictures with students to encourage their engagement and to inspire them to read more. The inspirational book “Clifford Ray Saves the Day” highlights Clifford Ray’s true story of saving a dolphin.

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Blair Underwood (left) and Barbara Lee (right). Courtesy photo.
Blair Underwood (left) and Barbara Lee (right). Courtesy photo.

By Paul Cobb
New Oakland Series
Opinion Part 3

The Post mentioned three weeks ago that a number of our local luminaries were coming together to support the “New Oakland” movement. As this current national administration continues to eliminate our “legacy” institutional policies and programs left and right, most communities find themselves beyond “frozen” in fear.

Well, esteemed actor, long-time Bay Area supporter, and philanthropist Blair Underwood returned to Oakland this week to speak with city leaders, community trust agents, students, the Oakland Post, and local celebrities alike to continue his “New Oakland” initiative.

This week, he kicked off his “Guess Who’s Coming to Read” literacy program in some of Oakland’s middle schools. Clifford Ray, who played the center position of the 1975 World Champion Golden State Warriors, donated close to 1,000 books. Ray’s fellow teammate Charles “The Hopper” Dudley also gave Converse sneakers to students.

These community activations were coordinated with the San Francisco-based non-profit program “Room to Read.” Ray said he is also donating his time to read and take pictures with students to encourage their engagement and to inspire them to read more. The inspirational book “Clifford Ray Saves the Day” highlights Clifford Ray’s true story of saving a dolphin.

Underwood also spent quality time with the Oakland Ballers ownership group and visited the amazing Raimondi Park West Oakland community revitalization site. In the 1996 TV film Soul of the Game, Underwood played the role of the legendary first Black Major League Baseball player Jackie Robinson and commended the Ballers owners.

“This group of sports enthusiasts/ philanthropists needs to be applauded for their human capital investment and their financial capital investment,” Underwood said. “Truly putting their money and passion to work,” Underwood said.

Underwood was also inspired by mayoral candidate Barbara Lee’s open-minded invitation to bring public-private partnership opportunities to Oakland.

Underwood said he wants to “reinforce the importance of ‘collaborative activism’ among those most marginalized by non-empathic leadership. We must ‘act out’ our discomfort with passionate intentions to create healthy change.”

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Activism

Councilmembers Ramachandran, Kaplan, Unger Identify Funds to Save Oakland Fire Stations

Our budget crisis – one of the worst in Oakland’s history – is compounded by the fact that people do not feel safe coming to Oakland due to our public safety crisis. By investing in our fundamental public safety resources today, we can send a signal to the world that Oakland is open for business. We have such a rich and vibrant culture, arts, and food scene that is worth celebrating – but we can only showcase this if we are able to keep our neighborhoods safe. Having fully functioning fire stations are absolutely essential to these efforts.

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Councilmember Janani Ramachandran. Courtesy photo.
Councilmember Janani Ramachandran. Courtesy photo.

By Janani Ramachandran

There is no greater concern to the people of Oakland today than public safety. Fire stations are the bread and butter of essential city services – and every day that we have stations shuttered, we imperil the lives of our community members. In response to widespread outcry over the current and planned closure of stations, myself, along with Councilmembers Kaplan and Unger, have painstakingly worked to identify millions of dollars of new funding to save our stations. The legislation we introduced on Thursday, February 13th, will amend our budget to prevent the closure of four fire stations that are currently on the chopping block due to our budget crisis and will re-open two closed stations that have already been closed – Station 25 and 28 – in the near future. The resolution that will provide the funding to keep our stations open will go before the full City Council for a vote at our meeting on Tuesday, March 4th at 3:30 PM – and we invite you to join us at City Hall to share your perspective on the topic.

Our budget crisis – one of the worst in Oakland’s history – is compounded by the fact that people do not feel safe coming to Oakland due to our public safety crisis. By investing in our fundamental public safety resources today, we can send a signal to the world that Oakland is open for business. We have such a rich and vibrant culture, arts, and food scene that is worth celebrating – but we can only showcase this if we are able to keep our neighborhoods safe. Having fully functioning fire stations are absolutely essential to these efforts.

With the devastating Los Angeles fire at the top of people’s minds, terrible memories of Oakland’s own wildfires are re-surfacing from the 1991 Oakland Hills Firestorm to the Keller fire just a few months ago – and how essential fire stations are to mitigating these catastrophes. But in Oakland, our fire stations don’t just fight wildfires – they also provide emergency medical services to our most vulnerable constituents, put out structural fires and encampment fires, and much more.

We recognize that there are a number of competing interests and important initiatives fighting for sparse City resources. But from my perspective, core safety services are the most pivotal functions that a City must spend its resources on – especially given the outcry we have heard around fire stations.

The fight to save our stations is not over. The resolution we introduced is a critical first step, and there are hurdles to overcome. If you support keeping our fire stations open, we invite you to be a part of the solution by making your voice heard at the March 4th City Council meeting at 3:30 pm.

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