UPDATED: 1/12/18 4:26 pm ET — adds details
A report released Thursday by the National Fair Housing Alliance alleged that it found racially discriminatory pricing tactics in car financing by dealerships.
The report, which focuses on indirect lending whereby dealerships help to arrange financing from lenders, found stark differences in the way that white and nonwhite customers were treated when they were presented financing options. The report found that 63 percent of the time, nonwhite consumers were presented with heftier pricing options than their white counterparts, even though the white consumers were less creditworthy.
“Overall, this investigation found that, when auto dealers have pricing elements at their discretion, there is an opportunity for discrimination to occur,” the report said. “This investigation revealed that, more often than not, auto dealers took that opportunity to discriminate.”
The findings were based on an investigation into eight dealerships selling seven brands in eastern Virginia.
That tiny sample size was one of many complaints the National Automobile Dealers Association had regarding the report and its findings.
“Every customer deserves to be treated fairly. There’s no place for discrimination in auto lending or sales,” said NADA spokesman Jared Allen.
But, he added, “It’s highly irresponsible to draw conclusions from a study based on a handful of interactions that did not even lead to sales in a market where 17 million sales occur each year. The claims made in the report are in no way representative of the majority of new-vehicle interactions.”
A spokesman for the American Financial Services Association said the Washington group, which includes most automotive, credit card and other lenders, had not yet had a chance to read the report or examine its methodology, but added that AFSA “and its 450 member companies condemn any form of discrimination in auto lending and in our society as a whole.”
The alliance used what is known as standard paired testing, where two testers — one white and one nonwhite — entered a dealership and inquired about buying or obtaining financing for the same car, down to the same vehicle identification number. The testers arrived at the dealership within 24 hours of each other on weekdays early in the month to avoid end-of-month pricing deals.
In each case, the nonwhite tester had a better credit score. In seven of the eight pairs, the nonwhite tester also had a higher income. In the other test pair, the nonwhite tester’s income was less than that of the white tester, but the nonwhite tester had a better debt-to-income ratio.
The testers within each pair sought the same down payment, asked for the same monthly payment and were instructed to avoid asking for a specific loan term. Each tester also was trained to ask one time if the quoted monthly payment option was at the best interest rate the dealer could provide but otherwise was instructed not to negotiate or haggle the price, rate, term or other features. Testers also were instructed to reject any warranties and add-ons.
The testers were paired to be similar based on age, gender and other factors that would make them eligible for discounts, such as military affiliation or recent college graduation.
The report found that in five cases out of the eight, the more qualified nonwhite testers were presented with higher pricing options, paying an average of $ 2,662.56 more than the white testers over the course of the life of the loan for the same vehicle. In the most extreme case, the nonwhite tester was presented with a financing option that would have cost $ 4,741.20 more than the less qualified white tester.
In spite of credit differences, white testers also were given more attractive loan terms.
White testers also were more likely to be taken seriously, the report says, while nonwhite testers were believed to have lower credit scores. For instance, initial interest rates given to nonwhite testers hinged on “average credit” as opposed to their actual scores, and financial officers made it tough for the nonwhite testers to retrieve their actual scores.
Lisa Rice, one of the report’s co-authors, rejected the argument that results were invalid due to the small sample size, saying the report was the result of a real-life “undercover investigation,” not a scientific study.
“Often times when you do studies, people push back and say, ‘Oh, it’s all theoretical. It’s all hypothetical. This isn’t what really happens to people.’ So we do an investigation to say, ‘OK, this is what actually happens to people.’”
While the National Fair Housing Alliance would like to be able to conduct similar investigations “in many more states,” she said, it only had the resources to do so in one state.
The report shows salespeople and finance officers were more likely to work with white testers to reduce prices, sometimes by ignoring policies and protocol and reaching out to personal contacts.
In addition, white testers often were offered extra assistance 75 percent of the time. In one case, a white tester had a credit score of 706, and the salesperson offered to “call his buddy” at the credit union to drive up the score to 720 to garner better financing options.
The written report did not acknowledge that shoppers with lower credit scores, regardless of race, typically require more assistance from dealerships’ finance managers in obtaining loan terms.
“We know African Americans and Latinos have lower credit scores than whites in general. So then why in general do African Americans and Latinos pay more? If they need more help, then why aren’t you bending over backwards” to help them, report co-author Rice told Automotive News.
“In one case, the auto dealer offered to call his friend at the credit union to artificially bump up the credit score for the white tester,” she said. “Well, why aren’t you doing that for your African American clients and Latino clients?”
Across the board, the report found that finance officers were vague when giving details needed to determine the cost of the vehicle. “It was almost impossible for testers to determine the actual price of the vehicle in many cases,” the report stated.
The investigation was conducted between autumn 2016 and spring 2017.
The National Fair Housing Alliance, in Washington, D.C., is a consortium of more than 220 private, nonprofit fair housing organizations, state and local civil rights agencies and individuals dedicated to ending discrimination in housing.