Things that are okay for a car dealer to do: charge a buyer seeking financing a different rate based on his or her credit history. Things that are completely not okay for a car dealer to do: charge a buyer seeking financing a different rate based on his or her race. And yet they just keep doing it anyway.
Car dealers have a nasty and pernicious habit of charging black and Latino customers higher rates than white ones, a study from the Center for Responsible Lending has found. The full report (PDF) delves into the research, methodology, and findings.
It’s not a matter of one group of buyers being less savvy shoppers than another group: white buyers were actually the least likely to try to negotiate the terms of a loan, with only 22% of white buyers giving it a go. In contrast, 32% of black buyers and 39% of Latino buyers negotiated their interest rates.
Earlier research cited in the report found that the race-based discrepancies persist when controlling responses for customers’ credit rating–and that they disappear when buyers are shopping on the internet, rather than in-person.
So if customers are shopping around equally, shoppers of color are negotiating more often than their white counterparts, and credit background isn’t the issue, then that doesn’t start to leave many other variables.
In an understated way, the CRL says that yes, racial discrimination is the problem:
[I]f consumers of color negotiate and shop around just as much as their white counterparts and still experience pricing disparities, it raises the possibility that other factors at the dealership prevent the car financing process from working the same for all consumers.
With racial disparities in dealer interest rate pricing found in several reports, our research shows the possibility of outside factors preventing a level playing field for all consumers. This new research supports the likelihood that dealer practices, such as interest rate markups, have a discriminatory impact on borrowers of color.
Non-white borrowers also received “misleading information” from car dealers at a much higher rate.
So how to solve the problem? The CRL report suggests adding a few new regulations to car dealerships:
- A rule “prohibiting dealer compensation that varies based on the interest rate or other material terms of the loan, other than the loan’s principal balance”
- A rule “requir[ing] dealers to disclose the actual costs of every add-on product sold during the financing process and to reveal the cost of the car without add-on products,” and
- Regulation that “should prohibit dealers from representing that the buyer is required to purchase ancillary products in order to obtain financing.”
Regulation changes to make car salesmen more honest sounds like a good idea all around–especially for those buyers they’ve been misleading the most.