Regulation and Discrimination: Race and Interest Rate Mark-Ups in the Auto Loan Industry

Abstract

In 2013 the Consumer Financial Protection Bureau (CFPB) introduced guidance targeting discriminatory auto lending practices by indirect lenders. The guidance holds indirect lenders responsible for discrimination at the dealer level if the mark-up they permit on their loans creates an ability for the dealers to discriminate. In theory, the guidance should lower the ability of dealers to discriminate through interest rates because it holds the indirect lenders who allow mark-up responsible for the final interest rate. This paper analyzes the short and long-term effects of the guidance on discriminatory auto lending to determine how effective reducing interest rate discrimination was in practice. I utilize data from the 2010, 2013, and 2016 Surveys of Consumer Finances in order to analyze the effect of the guidance implementation by the CFPB on differences in borrower Annual Percentage Rate (APR) on auto loans. Results from an Oaxaca-Blinder decomposition conclude that the period while the guidance was active did not result in any significant decrease in the level of discrimination.