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

This article analyzes the impact of the Consumer Financial Protection Bureau’s (CFPB) 2014 supervisory highlights, which recommended that auto lenders eliminate dealer discretion in interest rate markups by adopting flat dealer compensation to reduce racial disparities in indirect auto lending. Using detailed transaction-level data and a regression-discontinuity-in-time design, the study finds that while dealer markups declined modestly after the intervention, buy rates increased correspondingly, resulting in no significant change in consumers’ total interest rates or total payments. The intervention’s effects varied by lender type: credit unions were more likely than banks to adopt flat compensation, leading to larger markup reductions but also higher buy rates for credit union loans. Importantly, although dealer markups decreased for both minority and nonminority borrowers, the reduction was smaller for minorities, causing the racial gap in dealer markups and total interest rates to widen due to a dealer-driven spillover effect that disproportionately benefited nonminorities. These findings highlight both intended and unintended consequences of voluntary regulatory guidance on auto loan pricing and racial disparities in consumer financing.