Fair Lending in Car Financing: Unintended Racial Consequences of Consumer Financial Protection Bureau Supervision of Dealer Markups

Abstract

Over 80% of car buyers in the United States obtain a loan through a dealership. Dealers often mark up lender-provided interest rates (buy rates), but consumers cannot distinguish these markups from total rates. In 2014, the Consumer Financial Protection Bureau made an unprecedented public disclosure regarding its supervision of auto lenders, revealing racial disparities in dealer markups disadvantaging minority borrowers. The Bureau strongly recommended—but did not mandate—that lenders providing loans through dealers eliminate dealer discretion in markups by adopting flat dealer compensation per transaction. The authors examine the effectiveness of this intervention in reducing consumer financing, car payments, and the racial gap. Using detailed individual transaction-level data and a regression-discontinuity-in-time design, they find that dealer markups declined by 5.55 basis points after the intervention, saving $66.60 for a typical loan. However, the intervention also increased buy rates, resulting in no significant changes to consumers’ total interest rates and total payments. Dealers experienced a slight increase in financing profits but no significant change in vehicle profits. Importantly, the racial gap in dealer markups and total interest rates widened; dealer markups decreased for both minorities and nonminorities, but they decreased more for nonminorities. The findings can illuminate the intended and unintended consequences of such government oversight and provide insights into their underlying mechanisms.