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Urban Rhythms

Lend Least

By Wiley Hall III | Posted 7/18/2001

A statistical study of more than 300,000 car loans arranged through Nissan dealers across the country has found that African-American consumers in 33 states paid higher interest rates and finance charges than their white counterparts, regardless of income and credit history. The disparity was greater in Maryland than in any other state. Here, researchers found that the average black customer paid $800 more than the average white customer.

The study was conducted on behalf of plaintiffs in a class-action civil suit against Nissan Motor Acceptance Corp. and General Motors Acceptance Corp. The suit charges that the lenders' credit policies have a disparate and unfair impact on African-Americans. Officials with Nissan and General Motors deny the allegation.

It is worth noting that the allegations of discriminatory lending practices in the auto-loan industry are not that different from charges leveled against the mortgage and personal-credit industries. Similarly, minority-owned businesses have a harder time raising venture capital than their white counterparts. These claims are supported by exhaustive studies that demonstrate that minorities, particularly African-Americans, pay a premium because of the color of their skin. Call it a "black tax."

At the same time, each of those allegations is countered by equally exhaustive studies that purport to demonstrate that lending institutions have legitimate business reasons for treating minorities differently. And so, the issue has moved into the realm of faith, like so many other racial questions. Some place their belief in the evidence that discrimination exists. Others have faith in the evidence that it does not.

This new study isn't likely to sway true believers in either camp. But it does shed light on the all-but-hidden practice of dealer markups and credit scoring. And all consumers, of whatever race and hue, should find it interesting just how subjective this business of extending credit has become.

Here's how the system works: Car dealers offer to process loans for their customers, promoting this as a one-stop-shopping convenience. Meanwhile, lenders permit dealers to charge any interest that the customer will accept so long as it is allowable by law. Let's say the interest rate on a given loan is 8.5 percent. But the dealer looks at the customer in front of him and thinks, Hmm, she looks young and gullible. Let's see if she'll go for 10 percent. If the customer bites, the dealer and the lender split the proceeds. Then another customer comes in, nervous and afraid that his credit isn't good enough. When the dealer offers him a loan at 15 percent, he's actually grateful. Again, dealer and lender split that extra 6.5 percent as pure gravy.

Most consumers don't know that they're being judged this way. Even those who think they're savvy may haggle over sticker prices and then get stuck when they arrange for financing. Credit scoring--using arcane formulas that only recently became public--and the compiling of credit histories in national data banks lend a patina of scientific objectivity to the process. In reality, lenders are just like snake-oil salespeople. Their so-called science is often just smoke and mirrors.

History has shown that minorities suffer whenever subjective determinations are made in consumer lending. Indeed, evidence presented in the suit against Nissan and General Motors shows that blacks were more than twice as likely than whites to be charged a markup, and that markups for African-Americans tended to be significantly higher than those for whites. In addition, blacks were steered away from loans offering the most attractive rates, even when they qualified for such terms based on credit histories. The difference in rates could cost a black customer hundreds, even thousands of dollars.

It may be, of course, that race is not the determining factor in the subjective decisions car dealers make about people. Maybe gullibility is more important than skin color. It may even be due to a combination of factors. For example, if African-Americans have to work harder than everyone else to qualify for a loan, they may be less likely to shop around for more attractive terms. Maybe paying 15 percent on an 8 percent loan is normal for even an affluent black, while a working-class white would storm out the door in outrage.

To my mind, though, taking advantage of the gullible and the weak is just as bad as taking advantage of someone based on his or her race. Plaintiffs are seeking an immediate halt to the practice of dealer markups. The U.S. Justice Department and attorneys general in several states are watching this slow-moving case closely. A victory for the plaintiffs will not benefit African-Americans alone. All consumers, black and white, gullible and wise, will win.

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