Updated, 3:13 p.m. | When Pedro Lantigua, a 32-year-old truck driver from Oklahoma City, decided to trade in his vehicle last summer, he walked into his local dealership and drove off with a brand-new Chevrolet Silverado. Like millions of Americans, he agreed to a loan arranged by the dealer.
Unlike most buyers, Mr. Lantigua actually knows how much he spent on that service, but only because the details came out when he sued the dealer for breach of contract related to his trade-in.
Mr. Lantigua agreed to pay $609 a month, meaning he would own the truck in about six years. But Mr. Lantigua said he did not know that his 12.6 percent interest rate included about $1,000 for the dealership, David Stanley Chevrolet, which arranged Mr. Lantigua’s loan through Ally Bank, according to Mr. Lantigua’s lawyer, Kathi Rawls.
Dealers often arrange loans for car buyers through third-party lenders, providing something of a one-stop shop for about 80 percent of all consumers who need financing. Dealers can decide how much they want to charge for that service and tack their fee onto the lender’s interest rate.
“Individual consumers usually don’t even know that they’ve been marked up,” said Rosemary Shahan, the president of Consumers for Auto Reliability and Safety, a nonprofit consumer advocacy group.
Dealerships are not required to disclose what percentage of the interest rate goes to them, and consumer advocates and some regulators are concerned that dealers’ ability to decide how much to charge has led to discriminatory lending against minorities. That concern has prompted a number of government investigations into the growing business of auto lending. Auto loan originations increased in the third quarter, to $97.4 billion, the highest level since the third quarter of 2007, adjusted for inflation, according to a report from the Federal Reserve Bank of New York. That rise has been matched by a strengthening market for securities backed by such loans.
Mr. Lantigua, who is Hispanic but is not accusing the dealership of discrimination, saw his loan documents only after filing his lawsuit. A lawyer for the dealership did not respond to requests for comment.
Dealer and consumer advocates disagree on just about every aspect of the dealer compensation process, including what these fees should even be called. Critics call them markups; lenders and others refer to them as dealer participations.
The National Automobile Dealers Association says franchise dealers typically do not charge more than 1 percent interest on average, a figure that it contends is fair compensation for acting as the middleman. The association also says that switching to a flat fee, one alternative suggested by consumer advocates, would only result in higher costs for car buyers.
But some consumer groups say that average fees range a bit higher, from 2 to 2.5 percent, depending on the terms — differences that can add hundreds of dollars over several years.
Moreover, those consumer advocates and the Consumer Financial Protection Bureau say that African-American, Asian and Hispanic borrowers often end up paying more than white borrowers with comparable credit backgrounds.
“In some cases, these disparities are significant,” said Rohit Chopra, the acting assistant director for installment lending at the bureau. He said the bureau had found differences of 10 to 30 basis points at some financial institutions.
Dealers are also likely to charge higher fees for borrowers with weaker credit, according to a 2011 study from the Center for Responsible Lending. That practice can also single out minorities because “borrowers of color are disproportionately represented in the subprime market,” said Chris Kukla, senior vice president at the Center for Responsible Lending.
At stake are billions of dollars in fees on more than $700 billion in outstanding auto loans. The consumer protection bureau says that it has found tens of millions of dollars in disparities between minority and white car buyers.
The issue of whether those fees violate fair-lending rules has now been taken up by the Justice Department. A senior official, Steven H. Rosenbaum, chief of the housing and civil enforcement section, disclosed during an industry trade forum last week that the department was in the middle of a number of joint investigations with the consumer bureau about auto loans.
The investigations center on whether dealers have violated the Equal Credit Opportunities Act, which prohibits credit discrimination based on minority, religious or other protected statuses.
The consumer protection bureau upset many in the auto industry in March when it issued a bulletin that said lenders could be held responsible for pricing disparities made by the dealerships with which they do business.
But pinpointing exactly where that discrimination is taking place is a challenge. The consumer protection bureau does not have access to information on individual consumers to determine factors like sex and ethnicity. Instead, it must rely on small bits of information, like part of a borrower’s name, to make some general assumptions about ethnicity and credit quality.
“We can’t measure the amount of discrimination because the data’s just not available to us,” Mr. Kukla said. Consumer advocates also point to several class-action settlements from the mid-2000s that found that African-Americans and Hispanics often paid more for auto loans than white borrowers. Such class actions are more difficult today, they say, because most car contracts now include arbitration clauses and other legal limitations.
That lack of specificity is a big problem for people in the auto industry, who say that such surveying practices fail to consider other more “neutral” factors that affect loans, like the type of vehicle being purchased. A bipartisan group of senators also raised some concerns over the methodology in a letter they issued to the bureau last month. “Our hope is that they will reveal the full methodology they’re using to come to that conclusion so that we can assess whether there’s any issue here at all,” said Paul D. Metrey, the chief regulatory counsel in the auto association’s financial services, privacy and tax division.
Ally Bank, one of the nation’s largest auto lenders with $9.6 billion in loans as of last quarter, recently disclosed it was under investigation by the consumer protection bureau, which the bank said had warned it of its failure to prevent discrimination among its partner dealers.
“Ally does not condone discriminatory lending practices,” a bank spokeswoman said in an email. “We have implemented a dealer monitoring program and if discriminatory behavior is suspected, there is a plan in place to address it.”
Loans made to subprime borrowers can also prove problematic. Subprime borrowers with markups have a greater chance of losing their car or falling behind on payments than prime borrowers with markups, according to the Center for Responsible Lending.
Scrutiny on these types of loans has gained urgency in the aftermath of the financial crisis, which underscored the risks of subprime lending. Like subprime mortgages, some subprime auto loans can be bundled, sliced and sold as securities.
Mr. Metrey and consumer advocates do agree on one thing: Consumers should shop around for loans before they walk into a dealership.
“The main defense for someone is to come in with multiple offers,” Mr. Kukla said. “And even then, it’s not foolproof.”