For Immediate Release Monday, January 26, 2004
Contact: Jack Gillis, 202-737-0766 Brian Alexander, 202-331-1550
REPORT CONCLUDES HIDDEN AUTO FINANCE CHARGES COST AMERICAN CAR BUYERS AS MUCH AS ONE BILLION DOLLARS ANNUALLY
INDUSTRY-WIDE PRACTICE HAS LED TO DISCRIMINATION AGAINST AFRICAN-AMERICANS AND HISPANICS Washington, DC – American car buyers are being charged at least hundreds of millions and as much as a billion dollars annually in undisclosed “finance markup charges” when they finance their cars at automobile dealerships, concludes a report released today by the Consumer Federation of America (CFA). The report titled, “The Hidden Markup of Auto Loans: Consumer Costs of Dealer Kickbacks and Inflated Finance Charges”, describes a markup practice encouraged by all of the auto industry’s leading captive finance companies and top auto lending banks. The markup takes place when automobile dealers subjectively hike the car loan rates of buyers who arrange financing through those dealers. Consumers are led to believe they are receiving a rate based on their creditworthiness, but often pay marked-up finance rates determined arbitrarily by the dealer and encouraged by the lender. Most of these undisclosed markup charges are kicked back to the dealer by the lender, with the lender retaining the remainder. According to several studies, these markups historically have affected about one in four consumers who get car loans through the dealers. Moreover, the subjective nature of this dealer markup has led to discrimination against AfricanAmericans and Hispanics. These minority car buyers are marked up more often, and, when they are, are charged on average hundreds of dollars more than are other Americans, even when they possess similar credit histories, according to the report. “These hidden finance kickbacks typically add at least $1,000 to the cost of an auto loan, and are costing consumers as much as one billion dollars annually” says Stephen Brobeck, Executive Director of CFA. The finance markup charge is an industry wide practice, which impacts about one-in-four buyers of new and used cars who finance their purchase through the dealership. Data on lending by General Motors Acceptance Corporation (GMAC) and Ford Motor Credit Corporation (FMCC), the top two auto lenders who together account for approximately 44% of U.S. auto lending,
reveal that their customers have paid hundreds of millions of dollars annually in the markup charges. The CFA report estimates that the total costs to all car buyers who finance through dealerships could be as much as one billion dollars annually. CFA, Rainbow/PUSH and National Council of La Raza call for reform. The CFA report findings were endorsed by two leading civil rights organizations, Rainbow/PUSH Coalition and the National Council of La Raza. “Finance markup charges have amounted to a costly skin tax, burdening African-Americans with even higher costs on one of the largest purchases they are likely to make in their lifetimes,” said Reverend Jesse L. Jackson, Sr., President and Founder, Rainbow/PUSH Coalition. "The practice of markup is unethical and immoral and should eventually be determined to be illegal. Until such time we are asking that leaders within the automotive industry establish a practice that is equitable and fair to all consumers regardless of ethnicity or nationality," Reverend Jackson added. National Council of La Raza spokesman Eric Rodriguez, said, “The family car is among the largest purchases most Hispanic families will ever make – second only to buying a home. Unfortunately, the report's findings show a systemic pattern of discrimination against Latinos in the auto lending industry. We call upon all lenders to ensure greater fairness and transparency in the auto financing process to end these unfair practices." Recent steps taken by the auto lending industry, such as capping the markup to three percentage points, are signs that the industry has been moving away from the worst forms of gouging that finance markup charges have enabled. In the worst examples of the markup, research has uncovered consumers paying more than $5,000 over the life of a loan. However, Brobeck notes, “A three percentage point markup will cost most car loan purchasers at least a thousand dollars, and these purchasers will be unaware that they are being charged a higher rate than what their credit score would call for.” Capped markups, the report argues, do not address the hidden nature of the markup, nor do they prevent consumers from being charged unfair fees or rule out the possibility of discrimination. Moreover, these steps do not provide remedy to those consumers already harmed by undisclosed dealer finance markups. Brobeck added, “We call upon the auto finance industry to put a stop to this secret and unfair consumer abuse.” No solution will be complete, the report argues, unless it includes the following: A. Disclosure of the markup percentage and dollar costs. B. Flat fees that are a one-time charge paid to dealers for placing a loan that do not fluctuate and are not based on the loan amount OR the term of the loan. C. Remedy programs for those already negatively impacted. D. Consumer education programs designed to give consumers a clear understanding of the automotive finance process, and awareness of any remedy programs to redress those affected by markup policies.
Numerous studies reveal unfair loan rate markups. Other measures have been undertaken to address the markup. In California, a ballot initiative has been introduced that would outlaw the practice. In the last several years, most major auto lenders have been sued by minority consumers on the basis that these markups have led to discrimination. The CFA report cites several studies of industry data produced in relation to lawsuits filed against captive auto lenders charging discriminatory application of the markup,
which reveal some of the impact of the markup on consumers and resultant discrimination. The findings include: • • At least 1 in 4 GMAC transactions received the markup, costing a sample of 1.5 million GMAC customers $421.6 million in the period January 1999 through April 2003. Over 1 in 4 FMCC customers were assessed a markup, costing a sample of 1.5 million FMCC customers an estimated hundreds of millions of dollars from November 1997 to December 2001. As many as 1 in 2 Nissan Motors Acceptance Corporation were assessed the markup, costing a sample of 310,000 consumers between $70 and $210 million, from March 1993 to September 2000. 28.2% of White GMAC customers were marked up versus 53.4% of African-Americans, who paid more than 2½ times in markup compared to Whites: $656 versus $244, a difference of $412. Such disparities exist across all credit tiers. 30.9% of White FMCC customers received the markup, versus 48.5% of African-Americans, who paid more than 2 times in markup compared to Whites: $684 versus $337, a difference of $347. Hispanic FMCC borrowers paid on average roughly $266 in additional finance costs per loan over non-Hispanic borrowers, for a total $36.1 million in additional finance charges over nonHispanic borrowers. Hispanic borrowers with excellent credit are the most adversely affected. In lending by NMAC in Florida, 62.6% of Hispanic borrowers were charged a finance markup, compared to 46.6% of Whites, costing Hispanics $305 more than Whites ($773 versus $468).
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Consumers urged to check with their bank or credit union before seeking auto financing from a car dealer. The report also advises consumers on how to avoid being a victim of finance markup charges at car dealers. They are urged to check with their bank or credit union before seeking auto financing from a car dealer. After selecting a car model, car buyers should call their bank or credit union for a rate quote. Then compare it to the dealer's quote. It is essential here that the buyer, not the dealer, make the call to the buyer's financial institution. If the dealer offers zero percent financing, they will not give consumers a rebate on the sale price. Car buyers should ask their bank or credit union whether it makes sense to take the rebate and finance the purchase at the regular rate, then compare their calculations with those of the dealer. A copy of the full report is available at: http://www.consumerfed.org/autofi-report.pdf.