Car-Loan
Rates Marked Up
More for Blacks, Report Says
(cont'd)
The lawsuits highlight the way car loans are drawn up and reveal an extra
cost that may be charged, but is usually not disclosed to consumers.
At the time of a sale, a loan application is submitted by a dealer to
the appropriate automobile lender, which in turn, sets an interest rate
based on a borrower's creditworthiness, the amount and length of the loan
and the type of car purchased (a used car, for example, generally comes
with a higher interest rate). Lenders then give dealers the flexibility
to raise that rate, what the suits call a "subjective markup."
The dealer usually gets to keep about 75 percent of such markups, the
lawsuits said.
From the start of the cases, GMAC has said it does not tolerate discrimination.
After the initial lawsuit against GMAC was filed, the company changed
its markup policies, first limiting them to 4 percent above the interest
rate based on creditworthiness and other objective factors. In August
2002, GMAC reduced that cap to 3 percent, Cohen's report said.
That 3 percent limit helped reduce the disparity but it remained, the
report said.
Farmer said he didn't understand why Cohen criticized the 3 percent cap
since borrowers agreed to the same limit in settling with Nissan's lending
arm. Stuart T. Rossman, director of litigation for the National Consumer
Law Center, one of the law firms representing black borrowers, said that
"what is critical is the total package of relief" in the Nissan
settlement.
Lawyers representing the black consumers in the GMAC case are seeking
court approval of class-action status. Their initial case, filed in 1998,
sought monetary damages. But a federal appeals court ruled against class-action
status in July 2002, saying that each consumer's loan was so highly individualized,
it would be inappropriate to group all the plaintiffs together in one
suit.
Plaintiffs' lawyers subsequently amended the lawsuit, dropping the request
for monetary damages, but seeking a court ruling declaring GMAC's credit-pricing
policy illegal and ordering the lender to cease its markup practices on
loans.
Cohen found the GMAC borrowers were charged a total of $421.6 million
in "subjective markup." Nearly 20 percent was paid by blacks
even though they were only 8.5 percent of the borrowers. Cohen found that
53.4 percent of African American borrowers were charged a markup, compared
to 28.2 percent of white borrowers.
Such markups are "pure profit gouging" regardless of the lender,
Rossman said. "People always negotiate hard for the purchase price
of a car but don't think they have the right or ability to negotiate for
the interest rate. The result has allowed dealers to make these markups."
California passed a law this summer requiring auto dealers to keep sales
records on how creditworthiness was determined. "We wanted to send
a message to the industry that these practices don't stand up to scrutiny
and it should clean up its act," said Rosemary Shahan, president
of California-based Consumers for Auto Reliability and Safety.
Cohen said discrimination in the GMAC loans was across the board, regardless
of the profession of a buyer or model of car purchased. The largest difference
in markups was for Cadillacs, for which African Americans paid an average
of $580 more in markups than whites. The smallest markup difference was
for Saturns; blacks paid an average of $93 more.
© 2003 The Washington Post Company
