The Washington Times headline reads: “DOJ reaches largest-ever federal government settlement over auto loan discrimination.”
First off, I wouldn’t shed a tear if the entire auto loan industry disappeared. I hate it. I think it is a complete rip-off. People should save money and buy a car with cash. So I have no interest whatever in helping companies that make loans to people so they can “buy” cars.
But for that very reason, I find it impossible to believe that the auto loan industry has failed to get as many victims customers as possible. The way they get people hooked on debt is to offer the lowest price and rate possible in order to attract as many people as possible to borrow money. In this case, the lowest rate possible has to do with how likely it is that the borrower will default rather than keep paying on the loan. Obviously, creditors lend money in order to make a profit. They are essentially renting the money. The higher the chance that the borrower will default, the higher the rate of interest the lender will charge him.
But the Department of Justice claims otherwise. They claim that, rather than extending the best terms possible, a for-profit company was charging racial minorities a higher price purely due to racism.
The U.S. Department of Justice and the Consumer Financial Protection Bureau (CFPB) announced Friday that the government has reached a $98 million settlement agreement with Detroit-based Ally Financial over discriminatory auto lending practices — the federal government’s largest auto loan discrimination settlement in history.
The investigation by the CFPB and DOJ found that Ally violated the Equal Credit Opportunity Act (ECOA) by charging African-American, Hispanic, and Asian and Pacific Islander borrowers higher dealer markups for their auto loans than similarly-situated, non-Hispanic white borrowers.
How “similarly-situated”? By any rational analysis this accusation means that Ally lost minority borrowers because they charged them a higher price. Why would any business deliberately drive away profitable customers? If the profit level was enough to make them willing to loan to whites, then why would they lose those profits by driving away customers by demanding a higher price?
Unless, of course, those minority borrowers actually constituted a higher risk.
What evidence does the DOJ have? No one is sure:
Skeptics also question the bureau’s employing an analysis method to determine potential discriminatory practices that relies heavily on estimates — a methodology that the bureau has not outlined in sufficient detail to satisfy members of Congress who have been pressing for it.
“Regrettably, in today’s announced enforcement action, the CFPB continues to withhold the secret methodology it uses to determine whether unintentional discrimination has occurred,” NADA said in a statement. “The public still does not know whether the Bureau takes into account legitimate factors that can affect finance rates — for example, a dealer’s ability, regardless of race, to lower the interest rate to meet a customer’s monthly budget.”
CFPB Director Richard Cordray defended it at a Senate Banking Committee hearing last month.
“Our proxy methodology — it’s something that has been used not just in these kind[s] of lending cases, but in a variety of other cases — employment discrimination cases and others, and is considered to be state of the art,” Mr. Cordray said. “Now, people may have their issues with ‘state of the art,’ but we’re not embarking on some novel or untested or brand new approach here.”
The DOJ has used its power to coerce a settlement. This was a shakedown; nothing more.