Congress, President Trump revive Jim Crow lending
Last week, President Donald Trump revived Jim Crow-era lending practices when he signed a resolution that makes it harder to hold accountable car lenders that charge people of color more for car loans than white people.
The resolution repeals guidance from the Consumer Financial Protection Bureau (CFPB) that held car lenders responsible when consumers were charged different rates based on race. Congress used a little known legislative maneuver called the Congressional Review Act to quickly pass the resolution and send it to the President’s desk.
After slavery, southern states passed Jim Crow laws to control African Americans. Laws included segregating public services like schools and buses, strangling voting rights and civic participation through poll taxes and voter registration reading tests, and unequal treatment under the criminal and civil justice systems. These laws epitomized the most shameful parts of American history, and led to wealth and education disparities that persist today.
Beginning in the 1940s, all branches of the U.S. government began working to tear down Jim Crow. The U.S. Supreme Court banned school segregation with Brown vs. Board of Education. Congress passed the 1965 Voting Rights Act to protect African-Americans’ right to vote. President Franklin Roosevelt issued executive orders banning racial discrimination by defense contractors and federal agencies; President Truman did the same to integrate the military. All of these actions led to enormous progress that brought America closer to being the land of opportunity for everyone.
This progress was never complete and discrimination remained. Unfortunately, in more recent years, the country began to eliminate investments and protections that created equity. New ways to discriminate and exploit people of color continue to surface.
Secret loan pricing fosters racial discrimination. Three-fourths of car buyers use a loan and 80 percent get financing through a car dealer, who collects information from the buyer to share with the lender. This determines loan qualifications and terms. The lender tells the dealer the interest rate they will offer and often allows the dealer to increase the rate, up to 2.5 percent, to pocket as compensation. Most customers are not aware of this practice, making it ripe for abuse.
Racial discrimination in auto lending is widespread and well documented. In the mid-1990s, several of the largest auto finance companies (Ally/GM, Honda, Fifth Third Bank) faced lawsuits for discrimination. Data from the lawsuits showed that white borrowers paid less for auto loans than black and Latino buyers with similar characteristics. The CFPB, working with the United States Department of Justice, conducted their own investigations and found that black, Latino and Asian/Pacific buyers paid hundreds of dollars more for loans than white buyers with similar financial backgrounds. Earlier this year, a National Faith Housing Alliance (NFHA) study found similar biases against people of color.
Racist auto lending creates barriers to building wealth for families of color. Discriminatory lending costs borrowers of color nearly $3,000 over the life of a loan, according to the NFHA. Multiply by the number of cars we buy over a lifetime and people of color lose even more money. This is part of the reason that, despite educational and income gains, people of color have less financial security. Discrimination in auto lending threatens the financial stability of our families.
The repealed CFPB guidance protected consumers. CFPB’s auto lending guidance curbed the practice and held unscrupulous lenders accountable. The CFPB and the U.S. Department of Justice worked together to return more than $140 million to borrowers.
The United States and American companies have discriminated against African Americans throughout our history. Some of the worst and longest lasting abuses have been in the financial sector. Reforms like forbidding housing discrimination in the 1960s and cracking down on red-lining in the 1970s enabled us to fix some deep inequities. Not holding auto lenders accountable for discrimination in car loan pricing will send us backward and reverse progress toward equity.