First “buy here, pay here” discrimination case

The US Department of Justice has reported a settlement in its first-ever discrimination lawsuit involving “buy here, pay here” auto lending, as a result of which two dealerships have agreed to set aside $225,000 to reimburse African-American clients intentionally targeted for predatory loans.

The case concerned Auto Fare and Southeastern Auto Corp, both of which are based in Charlotte, North Carolina. The two companies have also agreed to changes to their lending practices, including limits on projected monthly payments and interest rates and disclosures of devices that automatically and remotely shut off cars of delinquent borrowers.

The settlement resolves a lawsuit, filed in January 2014 by the Department of Justice and the State of North Carolina which alleged the two dealerships had a pattern of “reverse redlining” by intentionally targeting African-American customers for unfair and predatory credit practices in the financing of used car purchases.

The lawsuit alleged that the two dealerships’ sales prices, unusually large down payments and interest rates, were disproportionately high compared to other subprime used-car dealers. Payments and interest rates were set without actually assessing customers’ credit histories or their ability to make payments. Additionally, the dealerships engaged in repossessions when customers were not in default.

In one example, a 2001 BMW purchased for $7,610 was sold for $12,900 – a 70% markup. Even though the buyer’s only income at the time was unemployment payments, the dealership still approved financing. The customer paid $2,500 down and then made bi-weekly payments of $200. With an interest rate of 29%, the maximum allowed under state law, the consumer ended up paying a total $20,013.42 for the car – approximately 188% of its suggested retail value.

“It is not only illegal, but also fundamentally wrong, to target borrowers of color for predatory loans and exploit their need for a car to do essential tasks such as getting to work,” said acting assistant Attorney General Vanita Gupta of the Civil Rights Division. “I am pleased that these dealerships have agreed to reform problematic lending and servicing practices and adopt policies that promote responsible lending. I hope that other buy here, pay here dealerships will evaluate their practices in light of this settlement.”

The changes the dealerships are now required to make include limiting projected monthly payments to no more than 25% of a borrower’s income; requiring interest rates to be at least five percentage points below the state’s rate cap; mandating a lower interest rate for borrowers who have specified evidence of lower credit risk; requiring competitive sales prices; and prohibiting hidden fees on top of the required down payment.

They must also prohibit repossessions until at least two consecutive missed payments; provide down payment refunds to borrowers who quickly go into default; give borrowers improved disclosures at the time of sale (including disclosing the presence of any GPS, or automatic shut-off device); allow borrowers to obtain an independent inspection of the car before completing the purchase; and provide borrowers improved notices before repossession.

“All consumers deserve to be treated fairly when they buy a car,” said North Carolina Attorney General Roy Cooper. “We hope this case sends a strong message that car dealers cannot use race when targeting buyers with overpriced cars and oppressive loans.”

“Buy here, pay here” lenders accounted for 6.5% of the auto loan market in the third quarter of 2014, compared to the 35.4% market share of banks, according to data from Experian Automotive. Around 70% of their loans went to subprime borrowers in that period compared to around 13% of banks’ auto loans.