In legal challenges that threaten a basic dealership business practice and important profit source, class-action lawsuits in at least five states are attacking dealer markups on auto loans.
Two lawsuits filed in Nashville, Tenn., one of which has been joined by the U.S. Department of Justice, allege that the practice has allowed auto dealers to discriminate against blacks.
And lawsuits in Texas, California, Pennsylvania and New Jersey challenge the markups as a prima facie deceptive and fraudulent business practice, according to a report in The New York Times.
If the lawsuits succeed, dealers could face strict new controls on their lending and business practices. In the most extreme case, the right to negotiate higher fees could be taken away.
Under the practice, dealers tack additional interest on a loan approved by a captive finance company or bank. If, for example, Ford Motor Credit Co. tells the dealer it is willing to finance a customer at a 10.5 percent rate, the dealer is free to sign the customer to, say, a 13.5 percent rate - if he feels he or she can get away with it.
The markup - three percentage points in the above example - is then rebated to the dealer in cash, minus some percentage the lender retains for itself.
Depending on a dealership's annual sales volume, markups can generate tens of thousands of dollars a year in profit. For example, the difference between a five-year, $20,000 loan financed at 9 percent and at 12 percent is $1,704.
To plaintiffs, the commission is a kickback, an undisclosed payment to the dealer that gives the dealer every incentive to jack up the interest rate.
In this view, it is unfair for dealers to set the final interest rate on a loan because that means different customers pay different prices for the same goods.
In the view of the Nashville plaintiffs, the net effect is that blacks consistently pay more than whites for auto credit.
The original complaints in the Nashville cases stem from car purchases made in 1995. One plaintiff paid General Motors Acceptance Corp. 203/4 percent on a six-year loan - 21/2 percentage points higher than GMAC's minimum acceptable rate.
The other plaintiffs paid Nissan Motor Acceptance Corp. 19.49 percent, according to court documents.
Nissan is scheduled for trial in September; GMAC, in February 2002. The cases are both in U.S. District Court in Nashville. They are being heard by two different judges, but some of the same lawyers are litigating both lawsuits.
STUDY: BLACKS PAY MORE
The two Tennessee cases shifted from a consumer- to a civil rights orientation after a statistical analysis of thousands of GMAC and Nissan Motor Acceptance loans in the state purported to show that blacks consistently paid higher markups on their auto loans than did whites.
According to Gary Klein, one of the attorneys for the Nashville plaintiffs, the study showed that blacks paid GMAC and its dealers an average of $959 in interest rate markup while whites paid an average $643.
'The finance companies could have foreseen this and immediately ended it when they became aware of it,' Klein said in a conference call last week with reporters. Klein is a senior attorney with the National Consumer Law Center in Boston.
The captives are legally responsible even if the disparate impact is unintentional, Klein said.
In the other case, Clint Watkins, also a Nashville attorney for the plaintiffs, said a study of about 9,000 Nissan Motor Acceptance customers showed that blacks on average paid more than a $900 markup while whites paid slightly over $500.
CAPTIVES ATTACK ISSUE
The Justice Department has joined the suit against Nissan Motor Acceptance on the basis of precedents that apply to the housing and mortgage loan industry. Those standards require full disclosure of interest rates and fees being charged to the consumer and profit earned by the lender, and prohibit using race as a lending criterion.
'Banks are very concerned that the government is taking this position,' said Andrew Sandler, a Washington attorney and an expert on fair lending issues. His clients include several auto lenders.
'People in the industry ought to be concerned,' said a lawyer for one of the defendants, who asked not to be named. 'Because if somebody else had bought this loan instead of us, in the normal course of business, they would be the defendant instead of us.'
Both GMAC and Nissan have attacked the studies as misleading and flawed in their assumptions.
Janet Thornton, a statistical analyst hired by Nissan Motor Acceptance, said the plaintiff's numbers do not take risk into account. Her firm is Economic Research Services in Tallahassee, Fla.
'Within the least creditworthy tier ... I did not find any differences with respect to race,' she said.
Thornton said the plaintiffs averaged payments as if all customers belonged to the same risk category. Viewed that way, blacks do pay more on average than whites because there are more blacks in the highest-risk category, she said.
Of 9,400 contracts studied, she said about 19 percent were blacks. But blacks made up 44 percent of the highest-risk tier, she said.
GMAC also said in a written statement that the statistics are incomplete, inaccurate and based on too small a sample. GMAC does not even know the race of its applicants, the company added.
The plaintiffs maintain that there is a disparate impact on blacks independent of creditworthiness.
'The difference can't be explained by anything other than plain discrimination,' Klein insisted. 'It's the markup that's the problem.'