CONSUMER FINANCIAL PROTECTION BUREAU ON DISCRIMINATORY DEALER MARKUP

The Consumer Financial Protection Bureau (CFPB) released a bulletin explaining that the common practice of allowing dealers to charge buyers an interest rate higher than that approved by the lender could have resulted in discriminatory lending. The different between the two rakes is called the “dealer markup.”

As you can imagine, this markup has nothing to do with helping the buyer but padding the dealers profits. The CFPB found that minorities may have being charged a higher rate that whites with similar credit profiles pursuant to this practice. Chris Kukla, senior vice president at the Center for Responsible Lending is quoted as saying that “Past lawsuits have shown that borrowers of color were more likely to pay a markup. And when they did, they paid more than similarly-situated white borrowers.”

While not shocking that whenever there is money to be made someone will find a way, it is another example of how consumers get gouged by those they entrust with their business. Once the lender approves the loan they have already factored one’s credit worthiness and ability to pay before coming up with an interest rate. To get the dealers business, the lender allows the dealer to increase the rate offered to the buyer with a promise to split the profits. Hence, your credit is no guarantee you are getting the best rate from your dealer UNLESS you shop around.

Speaking of shopping around, all too often I see bankruptcy clients whose car loans are at the maximum allowed interest rate in Maryland and the sad part is that these vehicles are often bought used. Once you calculate they pay it is more than a new vehicle. Could it be that the dealership in those instances are receiving a share of that interest? Worth looking into if you are paying anything over 6% in interest.

One obvious solution to this is to obtain financing before you step in to the dealership! New home owners often do this and are required to do this by realtors who would rather not waste their time showing you that $500,000 mansion of your dreams when you can only be approved for half that amount.

At the end of the day, an educated consumer can avoid a lot of the more nefarious business practices because the market is competitive and will work hard to gain your business. That said is it not a guarantee that you will not be taken advantage of.

The CFPB has recommended that lenders consider eliminating the ability of dealers to mark up interest which is probably the only way to eliminate the likelihood of discriminatory practices in that space.

Do you think you are paying a higher interest rate than someone else with similar credit worthiness? You owe it yourself to have competent counsel review the fact of your case. You could be overpaying by hundreds if not thousands.