GMAC settles suit, but opponents will push for flat-fee loan markups

The lawyers who got General Motors Acceptance Corp. to lower its cap on dealer finance rate markups aim to eliminate percentage markups altogether within two years.

The plaintiffs' lawyers say they are a step closer to their goal after settling a class-action lawsuit against GMAC last week.

The settlement lets dealers continue to profit by adding to the annual percentage rate lenders offer them for consumer car loans. But it brings down the ceiling on markups from 3 percent to 2.5 percent. The plaintiffs' lawyers say they will push for more concessions until the markups are replaced with flat fees.

"A flat fee is more objective," says lawyer Clint Watkins of Brentwood, Tenn. "We see this as a long-term project."

Watkins is part of a team of lawyers that has similar suits pending against major lenders such as Chrysler Financial, Ford Motor Credit Co., Toyota Financial Services and Bank of America.

The lawyers shared in $9 million in legal fees authorized by a federal court in Nashville, Tenn., in the GMAC case. There will be no payments to the plaintiffs in the class-action lawsuit.

Watkins says 10 lawsuits are pending around the country. During the next two years he says that he and other plaintiffs' lawyers will try to chip away at the markup caps until it makes more sense to go to a flat fee.

The suit against GMAC claimed markups resulted in overcharges to minority car buyers. Even the 2.5 percent cap to which GMAC agreed leaves too much room for a dealer to favor one customer over another, Watkins says. With a flat fee there is no flexibility. A dealer gets the same fee for each transaction.

GMAC agreed to lower its cap on dealer interest-rate markups to 2.5 percent from 3 percent for loans up to 60 months long. Longer loans will have a 2 percent cap.

"We think this is an opportunity to demonstrate some leadership while at the same time preserving fair competition," says GMAC lawyer Greg Merryman. GMAC introduced a 4 percent cap in 2001 and reduced it to a 3 percent cap in 2002, he says. Three percent is the current industry standard.

Court records show that before GMAC introduced a cap, some dealers were fetching markups of as much as 22 percent, according to a 1999 study in Alabama, Louisiana and Tennessee.

But in today's low-interest-rate climate, 1 percent to 2 percent markups are typical, says Charlie Ognibene, a Boston attorney who represents lenders and has audited many of their dealers.

GMAC also agreed to the disclosures endorsed last week by three industry trade associations - the National Automobile Dealers Association, the American Financial Services Association and the Consumer Bankers Association.

The captive finance company said that within six months all of its contracts would disclose that interest rates are negotiable and that dealers may profit from handling loans.

Toyota Financial Services recently changed its contracts to include the disclosures. Ford Credit said last week that it would do the same. Such disclosures were part of Nissan Motor Acceptance Corp.'s settlement of a class action on similar charges in 2003.

Other key points of the GMAC settlement include providing no-markup loans to 1.25 million minority customers over the next five years and contributing $1.6 million toward consumer education programs.