Here’s an interesting thought of the day: The Consumer Financial Protection Bureau is wrong to try to stop racist auto dealers from giving terrible car loans to minorities.
Indeed, according to Ramesh Ponnuru, a Bloomberg View columnist, there are doubts that racial discrimination even exists in auto lending in the first place. And the CFPB proves critics right in trying to combat discriminatory lending in the auto industry.
This spurious claim is propped up by the following study by Charles River Associates.
According to Ponnuru, that study “found that differences in the way customers are treated 'can be largely explained by objective factors other than race and ethnicity. In addition, the use of race and ethnicity proxies creates significant measurement errors, overestimates minority population counts, and results in overstated disparities.'”
First of all, let’s set one thing straight: discrimination is rampant in the credit markets. Period. There are heavy-handed guidelines in the mortgage lending space that deal harshly with racist housing institutions. That there is no federal proxy for auto lending is nothing short of pitiful. And the CFPB should be lauded for trying to offer a remedy.
Indeed, Ponnuru is correct with his logistical argument that the CFPB may be overstepping authority here. But, the answer is not that the car loan industry should become self-regulated. As he notes, “there's an alternative way to reduce the risk of discrimination. The National Automobile Dealers Association, a trade group that opposes the CFPB's action, is promoting a program modeled on a consent agreement the Justice Department entered into with two car dealers to resolve accusations of unintentional discrimination.”
Unintentional discrimination? Is there really such a thing? The Urban Institute finds in the mortgage market, at least, "much of the evidence summarized here suggests that lending institutions may be discriminating without realizing it — through policies and procedures that have a disparate impact on minority borrowers, through subtle differences in the level of encouragement and assistance provided to whites and minorities, or through unexamined assumptions about the types of products and terms for which minorities can qualify."
"Lending institutions may believe that their practices and decisions have been "color blind," and the institutional changes they need to make to eliminate discrimination may not be obvious," the survey found.
Of course, mortgage lending can happen more as an arm's length transaction. But could there also be unintentional discrimination with car loans?
No, actually there can't be. These car dealers are out-and-out racists. Furthermore, that document is the NADA admitting guilt in the racist car loan industry.
Car dealers are judging you the moment you step on their lot. They eye you from a distance and make a call based purely on your appearence. And whether their cars happen to be in a good neighborhood or a bad neighborhood may help them hide behind the veil of this “oh my discrimination is unintentional” argument, the truth is simple; racism is rampant in auto lending.
According to this blog from the CFPB, “discriminatory markups in auto lending may result in tens of millions of dollars in consumer harm each year.” Translation: Car dealers are ripping off minorities.
That blog, by the way, also outlines some of the ways in which auto lenders can discriminate without getting caught. Sure, the majority of car dealers are responsible and honest, but what does that matter in a unregulated market?
In his article, Ponnuru provides three points against the CFPB's actions. Here are my three responses:
1. To criticize a regulatory authority for trying to overstep is correct.
2. To acknowledge the industry itself is trying to combat discriminatory lending, proves admission of the practice.
3. To say this racism doesn’t really even exist in the first place, is so enraging, I’m just going to stop here.