When the American consumer goes on an automobile lot to purchase a vehicle
and requests the dealer to arrange financing, the loan is not made by the dealer.
The dealer acts as an originator/arranger between the consumer and a lender.
There are numerous lenders in the American automobile business, including banks
and finance companies owned by automobile manufacturers (captives).
When a consumer requests the dealer for financing, typically the dealer faxes
the consumer’s credit application to a lender who determines an approved
interest rate by examination of the consumer’s credit history. The lender
then communicates the approved interest rate to the dealer and authorizes the
dealer to markup the interest rate, without informing the consumer. The dealer
and the lender then split the markup, as additional profit.
Thus, markup is the additional charges added to the consumer’s approved
interest rate, and split between the dealer and the lender.
2. What is the Effect of Markup?
Markup increases the cost of credit to the American consumer. Remember, markup
is only added after the lender determines an approved rate based on the consumer’s
credit history. [This approved rate is often called the "buy rate"].
Markup is then added to the buy rate, and the result is a more expensive rate
which the consumer pays.
3. Are Consumers Told About Markup?
Generally, the answer is no.
The lender authorizes the dealer to add markup to the approved rate (buy rate),
but prohibits the dealer from telling the consumer either: (1) the approved
rate; or (2) that the approved rate has been marked up. Generally, the consumer
does not know about markup, never knows their approved rate, and does not realize
that their interest rate has been secretly increased.
4. How Can a Consumer Learn Whether their Interest Rate Was Marked Up?
Markup is not disclosed on any document given to the consumer by the dealer
or by the lender. Usually, the dealer is prohibited by the lender from telling
the consumer about markup., However, both the dealer and the lender know exactly
how much the consumer has been marked up and have records containing information
about the markup.
Thus, in order to learn whether or not a loan has been marked up, the consumer
should contact their lender and their dealer, and specifically request information
about whether or not their loan was marked up.
When contacting the lender and the dealer, the consumer should have their
loan or account number available and specifically request: (1) whether or not
the lender allows interest rates to be marked up by dealers; (2) whether or
not the consumer’s loan contains markup; (3) what buy rate was approved
after review of the consumer’s credit application; (4) how much markup
was added to the approved buy rate; and (5) how much of the markup was retained
by the lender. The consumer should specifically request that this information
be provided to them by a corporate representative in writing.
5. What is a Captive Finance Company?
Generally, there are two types of lenders in the American automobile financing
business, banks and captive finance companies. A captive finance company is
essentially a lender owned by an automobile manufacturer. Examples are GMAC
(General Motors Acceptance Corporation), NMAC (Nissan Motor Acceptance Corporation),
Ford Credit (Ford Motor Credit Company), Chrysler Credit (Daimler Chrysler).
Typically, these companies are wholly owned subsidiaries of automobile manufacturers.
The business of captives is to provide financing for customers through dealerships.
6. Do Both Banks and Captive Finance Companies Allow Dealers to Markup Interest
Rates?
Generally, yes. Although there are some exceptions, the large captive finance
companies and the large banks all authorize dealers to markup customer interest
rate, and split the profits.
7. What is the Danger of Markup?
Markup results in the cost of credit being determined by factors other than
the consumer’s credit history, or credit worthiness. By authorizing dealers
to increase a consumer’s cost of credit, without regard to the consumer’s
credit history, the lenders are causing some consumers to pay more for the same
extension of credit. For example, the markup system may allow your credit to
be increased because you are African American, or because you are Hispanic,
or because you are old. These factors have nothing to do with a consumer’s
credit history, and should not determine the price of credit. Also, because
the markup system is hidden from the consumer, many people, black and white,
believe they are getting their approved credit rate when actually that rate
has been increased without their knowledge.
8. What is the Equal Credit Opportunity Act?
The Equal Credit Opportunity Act (ECOA) is a federal law which prohibits discrimination
on the basis of race, color, religion, national origin, sex, marital status,
or age in any aspect of a credit transaction. Thus, pursuant to the ECOA it
is unlawful to discriminate in the cost of credit between persons of different
races. The ECOA attempts to guarantee a consumer’s history or credit worthiness
will determine the cost of credit not a consumer’s race or age.
9. Why Has the ECOA Been Used in the Federal Cases Involving Markup?
In the case of Coleman v. GMAC, a Federal District Court in Nashville, Tennessee,
ordered data production that has allowed an analysis of deal files which shows
that as a result of markup African Americans and Hispanics are paying more for
the same credit. Plaintiffs contend that African Americans and Hispanics are
more often victimized by the markup system, causing African American and Hispanic
customers to pay more for the same credit. Plaintiffs contend that this effect
of the markup system violates ECOA.
10. What Is Coleman v. GMAC about?
The plaintiffs in this case contended that African Americans and Hispanics
who purchased automobiles through GMAC paid higher prices for credit because
they received higher markups. The plaintiffs contended that as a result of markup
pricing, GMAC discriminated against African Americans and Hispanics as a class.
11. Has the Case of Coleman v. GMAC Been Settled?
Yes. The case was set for trial in Tennessee in February 2004, and a settlement
agreement was filed that month. On March 29, 2004, the U.S. District Court in
Nashville, Tennessee, will consider the final approval of the proposed settlement
agreement. Copies of all of the relevant settlement documents and disclosures
can be found at www.ecoa-settlement.com
12. What are the Major Terms of the Settlement Agreement?
GMAC has agreed to do the following:
a. Limit the amount of markup on certain automobile loans for the next three
years [a cap of 2.50% on loans for terms of sixty (60) months or less; and 2.00%
on loans for terms of more than sixty (60) months;
b. Disclose to consumers that loan rates are negotiable and can be negotiated
with the dealer;
c. Fund consumer education and assistance programs directed to African Americans
and Hispanic communities which will help consumers with respect to credit financing;
and
d. Offer 1,250,000 pre-approved, no mark up offers of credit to African Americans
and Hispanics over the next fiver years.
13. What is a Pre Approved No Markup Offer of Credit?
GMAC will examine the credit history of current and former customers who are
African American and Hispanic and send to them 250,000 offers of no markup loans
for the purchase of new or used GM vehicles each year for the next five years.
A priority will be given to members of the Class certified in the case, defined
as all African American and Hispanic consumers who entered standard rate contracts
with GMAC since May 10, 1989. African Americans and Hispanics receiving these
offers will be approved for an interest rate based solely on their credit history.
This interest rate cannot be marked up by the dealer. The offers may also indicate
whether the consumer qualifies for any special interest loan offers for specific
GM models. The certificate will be good for at least 30 days. During this period
of time, the consumer can take the certificate to a GM dealer and purchase an
automobile without further credit qualification, and without paying any markup.
14. What is the Value of the Pre Approved No Markup Offer of Credit?
First, the consumer is pre approved for a loan at a certain interest rate
and will not be required to further qualify for credit at the dealership. Second,
the dealer is not allowed to markup the interest rate. Typically, this will
save the African-American and Hispanic consumer, on average, about
$3,400 over the course of their loan.
15. How Can I Receive a Pre Approved No Markup Offer of Credit?
If you are a current African American or Hispanic GMAC customer, or have been
a GMAC customer at any time since May 10, 1989, you may receive a Pre Approved
No Markup Offer of Credit without doing anything. GMAC will be examining its
customer records for African Americans and Hispanics who are eligible for future
financing and mailing Pre Approved No Markup Offers directly to them.
16. What if I Have Individual Claims for Damages Against GMAC?
When the case against GMAC originally was filed by the plaintiffs, they sought
to obtain monetary recoveries for past injuries suffered by African American
and Hispanic members of the Class. The Court ruled, however, that such recoveries
were too individualized and would have to be pursued in separate cases brought
by individual consumers. As a result, the plaintiffs amended their Complaint
to seek only future relief and individual claims for damages against GMAC were
excluded from the case and the settlement. Therefore, you may accept the benefits
of the pre-approved no markup offers of credit without waiving any of your personal
claims or releasing GMAC from any potential liability for damages. In order
to recover such damages, however, you will have to bring your own case against
GMAC.
