10/24/00 10:45 a.m.
Cars, Color, and Cash
Racial discrimination in the auto-loan business.

By Roger Clegg, general counsel of the Center for Equal Opportunity

rticles in the New York Times and Wall Street Journal this week report that two of the country's top auto-loan companies — General Motors Acceptance Corporation and Nissan Motor Acceptance Corporation — are being sued for racial discrimination. Specifically, the claim is that they have participated in lending arrangements with car dealers that have resulted in blacks paying higher finance charges than whites on loans arranged by the dealers. The U.S. Justice Department's civil-rights division has intervened in one case on the plaintiffs' side and is expected to intervene soon in the other.

There are two basic issues. First, has racial discrimination occurred? Second, if so, who should be held liable for it?

So far, according to the news reports, there is no direct evidence of discrimination — that is, no smoking-gun memorandum or tape recording that anyone involved in making the loans was targeting blacks for discrimination. Instead, plaintiffs rely on "statistical studies" that the defendants say are profoundly flawed junk science.

There is certainly good reason to be wary of statistical evidence in lending cases. Some people will indeed be charged higher interest rates than others, but that's because some people are less likely to repay their loans. If those in this group aren't charged more, then the lenders will lose money. And if the government forbids this kind of discrimination — if, in other words, only one rate of interest can be charged — then lenders will simply refuse to lend money to people in this class at all. So everyone loses: The car dealers sell no cars, the lenders make no money, and some people who want to borrow money to pay for a car won't be able to.

But what about the claim that some groups are singled out for higher rates, not because of credit worthiness, but because of race? There is no reason to equate race or ethnicity with ineligibility for low-rate loans, after all. There are plenty of white people who ought to be eligible for only high-rate loans and plenty of minorities with solid incomes and credit histories who ought to be eligible for lower rates.

Assumptions to the contrary are discrimination on the basis of race or ethnicity. This is illegal. The Equal Credit Opportunity Act provides: "It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction…on the basis of race…."

This does not mean, however, that there is reason to assume discrimination if a company's pool of higher-rate lendees contains a disproportionate number of, say, African-Americans. This pool will include more people who are poor — since those with less money have a harder time paying back loans — or have bad credit histories. The fact is that this group is disproportionately black. Only 8.4 percent of white families are below the poverty level, versus 23.6 percent of black families. A study by Freddie Mac last year found that 48 percent of blacks have bad credit ratings, versus only 27 percent of whites. So a statistical imbalance standing alone proves little or nothing.

The second issue is whether, assuming there has been discrimination in loans arranged by the car dealerships, the two "acceptance corporations" can be held liable for then buying the loans.

The answer to this question ought to hinge on whether the acceptance corporations urged — or at least knew about — such discrimination. It would be completely unfair to hold them liable for bias that they were ignorant of, let alone did nothing to encourage.

Suppose, for example, that a company bought blocs of used cars from smaller dealers who attended auctions and scoured the classified ads for bargains. Suppose that some smaller dealers would, from time to time, refuse to buy a used car from a black person or attend an auction run or frequented by black people, for racist reasons. Should the company therefore be liable itself?

Common sense would dictate that the company be under no general duty to police the actions of the smaller dealers. And certainly if the company didn't even know that discrimination was going on, it shouldn't be held liable. To be sure, if the relationship between the company and the smaller dealers was very tight, and there was evidence that everyone new that discrimination was widespread, it becomes a closer call; and if in fact the company actually were encouraging discrimination because it thought it would increase profits or result in a competitive advantage, then a lawsuit starts to sound more plausible.

At this point all the facts aren't in. But the defendants have made some powerful points. The American Financial Services Corporation claims that lenders have spent millions of dollars to design credit-rating technology that eliminates any subjective bias, and the two defendant companies each claim that its managers are never in a position even to know a customer's race.

If the acceptance corporations are held liable anyway, then the end result is likely to be, not less discrimination, but fewer loans, period. And, in this case, the losers will again be not only the lenders and car dealers, but also the customers — disproportionately poor and minority — who will now be unable to get the loan they need to buy a car.