Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Jun 18, 2012

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Racism has long been a problem in America since well before the nation’s independence. Just as racism once held sway over both the political and social realms, we’re now seeing that it continues to plague the free market and economy as well.

According to the Consumer Financial Protection Bureau (CFPB), the auto lending industry has been found to be actively engaging in racially discriminatory auto loan practices. The CFPB recently launched a probe into whether many of the country’s top banks are privy to the issuing of racially discriminatory auto loans.

The CFPB’s probe is focusing on indirect auto loans, which are auto loans underwritten by auto dealers prior to being sold to banks. In indirect auto loan lending, banks purchase loans lent to borrowers through auto dealers.

Since banks are not directly involved in the lending process, they never meet the borrowers.

Despite being a very lucrative 300-billion-dollar-a-year industry for banks, these traditional lending sources have virtually no control over the terms and conditions of indirect auto loans. This lack of control may end up costing banks dearly now that the allegation of racial discrimination has prompted the CFPB’s ire. Those allegations have stemmed from the fact that some auto dealers are accused of gouging minority borrowers on loan pricing and interest rates.

Banks argue they are being wrongfully targeted by the CFPB since banks aren’t making the auto loans in question. By claiming they are not responsible for the methods used by unscrupulous or racist auto dealers, banks hope to avoid legal defeats which could prove costly for their bottom line and publicity.

What’s more is even if banks made a concentrated effort to lend indiscriminately, they would have little to no control over the indirect auto loans that they purchase since they never see the borrowers who receive these loans.

“A lot of lenders don’t really like this model but there’s no way out for them,” says John Van Alst, attorney for the National Consumer Law Center.

A potential preventative measure may be the banning of higher-than-average interest rates on loans, also known as markups.

Since auto loan markups are stemming from auto dealers, the CFPB can reach the root of the problem by banning markups. If the CFPB tries to regulate banks by banning markups altogether then it would be dealers who would be affected, even though auto dealers aren’t under the CFPB’s oversight. But since the CFPB doesn’t have legal authority over auto dealers, the bureau may instead scapegoat banks with fines or other penalties.

On the political field it remains to be seen to what degree the CFPB will face-off with the powerful and politically successful auto dealers’ lobby will. This same lobby victoriously prevented the CFPB from achieving oversight of the auto dealing industry back in 2010.

According to American Banker, the CFPB’s probe looks more like an investigation and not an analytical gathering of survey data. Banks desire a less damaging rule-making process that will prevent any future legal entanglements that would draw banks back in to court.

But, like purchasing stolen property or smuggled firearms, the banks are still linked to an unethical and illegal process that they continue to fuel through purchasing indirect loans. If indirect auto loans proved to be so caustic to the reputations and bottom lines of banks then surely the banks’ profit-motivated company officers would steer away from those purchases. If banks truly desired to distance themselves from racial discrimination by proxy then they wouldn’t continue to partake in a system being scrutinized for racially unfair practices.