Car-Loan Rates Marked Up More for Blacks, Report Says By Caroline E. Mayer Washington Post Staff Writer Wednesday, October 1, 2003; Page E01
African Americans were almost three times as likely as whites to be charged markups on loans financed by General Motors Acceptance Corp., according to an analysis by an expert working for minority borrowers in a lawsuit against the nation's second-largest auto lender. When charged a markup -- a higher-than-normal interest rate -- black borrowers paid an average of $1,229 in extra interest over the life of the loans, compared with the average of $867 paid by whites, the study of more than 1.5 million GMAC loans made between 1999 and April of this year concluded. Black postal workers paid an average of $811 more than white postal workers to get car loans, the report said. Black teachers paid an average of $595 more than white teachers. Even black GM employees paid more than their white counterparts to get a loan, Vanderbilt University business professor Mark A. Cohen wrote in the report, filed Aug. 29 in U.S. District Court in Nashville. "I have conducted numerous statistical tests of the data and conclude that the disparate impact against African-Americans cannot be explained by creditworthiness or other legitimate business factors," Cohen wrote. GMAC spokesman James Farmer said the company is reviewing Cohen's report and didn't want to comment until after its lawyers question Cohen. "There are percentages and dollar amounts paid that we don't understand," he said. Farmer said the company doesn't ask for a borrower's race in its credit applications. Cohen said in the report that he had access to 6.2 million GMAC transactions, but limited his analysis to the 1.5 million cases in which race could be determined, mostly through driver's licenses. The report found the differences to be nationwide, although they varied greatly among states. The biggest difference was in Wisconsin, where blacks paid five times as much as whites in loan markups. In contrast, blacks paid 1.3 times as much as whites in California. Locally, blacks paid 3.4 times as much as whites in the District, 3.1 times as much in Virginia and 2.5 times as much in Maryland. Cohen said the GMAC data also showed that blacks were less likely to be offered preferential interest rates. Thirty-six percent of African-Americans received interest-free percent loans and other special financing incentives, compared with 61 percent of white borrowers. Similarly, black college graduates were less likely to be offered below-market interest rates on car loans for recent college graduates. The lawsuit is one of a number of class-action cases that have been filed against major auto-loan companies around the country in recent years. They alleged that lenders' loan-approval policies gave car dealers the flexibility to increase rates, with the lender and dealer splitting the extra money. A class-action lawsuit against Nissan Motor Acceptance Corp. was settled in February. Nissan agreed to tell consumers that interest rates on loans may be negotiable. Nissan also agreed to offer preapproved credit, with no markups, to 675,000 African-Americans and Hispanic car buyers over the next five years. 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 of 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.
