Fair Lending in Car Financing : The Impact of the CFPB's Interventions on Dealer Markups and the Racial Gap

Car buying for more than 80% of consumers involves obtaining a loan at a dealership in the U.S. Many of these buyers unknowingly pay an undisclosed interest rate markup charged by car dealerships, i.e., a dealer markup. The opaqueness of the dealer markup practice and a regulatory vacuum have resulted in growing concerns about unfair lending. This study examines the effectiveness of the unprecedented heightened scrutiny of indirect loans through dealers by the Consumer Financial Protection Bureau (CFPB) to eliminate discrimination in dealer markups. We use quasi-experimental variation to generate counterfactual markups and exploit granular observations at the buyer-dealer-vehicle-lender-day level from a random sample of 20% of the census of U.S. dealers. We find that dealer markups declined by 12.98 bps (8.70%) after the interventions, a saving of $155.76 for a typical loan. However, we also show an increase in the rates lenders offer to consumers (buy rates) following the interventions, leading to no significant changes in consumers' total interest rates. Importantly, we find a significant increase in the racial gap in dealer markups and resulting total interest rates due to a rise in the percentage of indirect bank loans with zero dealer markups, which disproportionately benefited census block groups with a low (vs. high) percentage of minority buyers