New Report Highlights Impact of Hidden Practice of Auto Finance Markup on New Jersey Consumers

New Jersey Citizen Action Calls Upon State Attorney General to Investigate Practice That Has Led to Consumer Gouging, Discrimination Against African-Americans and Hispanics

TRENTON, N.J., Feb. 23 -- New Jersey car buyers have been charged tens of millions of dollars in undisclosed "finance markup charges" when they have financed their cars at automobile dealerships, according to findings highlighted in a report released today by New Jersey Citizen Action (NJCA), the state's largest citizen watchdog organization with over 60,000 members and 90 affiliate organizations. According to the report, the nation- wide practice of the markup has also led to a well-documented trend of discrimination against African-Americans and Hispanics in New Jersey. In a letter released at the press conference, New Jersey Citizen Action called on New Jersey State Attorney General Peter Harvey to investigate and propose corrective action to this unfair and discriminatory practice.

The report titled, "Hidden Auto Finance Markup: The Costs and Impact on New Jersey Consumers," describes a markup practice encouraged by all of the auto industry's leading captive finance companies and top auto lending banks. The report contains newly available statistics specific to New Jersey that have been avoidable as a result of two lawsuits filed against Primus Automotive Financial Services, Inc. (PRIMUS) and Nissan Motors Acceptance Corporation (NMAC). 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. A January 2004 report by Consumer Federation of America estimates that the total costs to all American car buyers who finance through dealerships could be as much as one billion dollars annually. The report indicates that these markups historically have affected about one in four consumers who get car loans through the dealers.

The subjective nature of this dealer markup has led to discrimination against African-Americans and Hispanics. Minority car buyers are marked up more often than Whites and they are charged on average hundreds of dollars more than are other Americans, even when they possess similar credit histories, according to the report.

New Jersey Citizen Action Executive Director Phyllis Salowe-Kaye, stated, "The secretive practice of the markup has yielded tens of millions of dollars in hidden costs to New Jersey car buyers and widespread discrimination against African-Americans and Hispanics." Salowe-Kaye added: "Some finance agencies in the industry have now begun to place 'caps' that limit the amount consumers can be marked up. Research has shown that caps do not end racial disparities in the markup. The best solution for all lenders to apply is full disclosure of any added finance costs. This will protect consumers from unfair fees and racial discrimination."

The report highlights costs of the markup to New Jersey consumers as exhibited in studies of industry data that have been filed in relation to discrimination lawsuits against major auto lenders. For example, in the period January 2001 through February 2004, 30,092 New Jersey car buyers who financed their purchase through the dealer using Primus Automotive Financial Services, Inc. (PRIMUS), a subsidiary of Ford, paid a total $13,732,400 in markups. This is an average markup of $456 per loan.

In response to litigation several auto finance companies have revised their lending practices, including further reducing caps, disclosing that rates quoted by dealers may be negotiable, and marketing a number of no markup loans to African-Americans and Hispanics. Notably, some companies, such as Ford Motor Credit Corporation and PRIMUS have yet to take such corrective steps. Ford has reduced its markup cap to 2.5 percentage points, while the markup cap on PRIMUS loans stands at 3 percentage points. Neither company has agreed to disclosure.

Despite the fact that many of the nation's top auto lenders have imposed caps on how much consumers can be marked up, even a markup 2.0 - 2.5 percentage points can add significant hidden costs to a loan. In one example of a New Jersey PRIMUS customer who was marked up, a markup of 2.25 percent on a 72-month loan of $46,791 yielded a $4,030 markup; the buy rate for this borrower was 11.00 percent and the APR after the markup was 13.25 percent.

The report shows that the markups in New Jersey follow suit with a national trend of discriminatory markups. The study shows that between 1993 and 2000, the average markup of a Black NMAC (Nissan Motors Acceptance Corporation) customer in New Jersey was $799, as compared to $460 for the average markup of a White NMAC customer, a difference of $339. Also, among PRIMUS, American Honda Finance Corporation (AHFC) and General Motors Acceptance Corporation (GMAC), the national trend shows average markups between $498 and $702 per loan. New Jersey car buyers have been marked up similarly by the same companies at rates between $456 and even up to $747 by AHFC.

Reverend Reginald Jackson, Executive Director of the Black Ministers Council of New Jersey stated, "Practices that lead to discrimination cannot be tolerated in auto lending. For many African-Americans, buying a car is their largest single purchase and they must be given a fair playing field where they will not be subject to hidden fees and they certainly cannot be allowed to be victims of racial discrimination."

Moreover, while caps may lower the amount of the markup, they may not end racial disparities between markups paid by Whites and those paid by African- Americans and Hispanics. During the 2001 to 2004 period, PRIMUS self-imposed a lowering of a cap on the markup from 5 percent to 3 percent on standard term loans (those of 60 months or less), effective March 1, 2003. But throughout the entire 2001 - 2004 period, African-Americans were consistently charged a higher markup than Whites at statistically significant levels regardless of which credit tier they fall under.

Martin Perez, Esq., President of the Latino Leadership Alliance said, "New Jersey holds one of the nation's highest Hispanic populations. Hidden, discriminatory auto lending practices hinder Hispanic's ability to realize the American dream and the state of New Jersey needs to guarantee an environment where Hispanics are not hindered because of their race."

The letter NJCA sent to Attorney General Harvey suggests several remedies to the problem of the markup. These include: full disclosure of the markup by dealers to consumers, the imposition of fully disclosed flat fees to compensate dealers who help consumers arrange financing, reimbursement to those who may have been unfairly charged and greater efforts at consumer education on how to avoid overcharges in purchasing a car. The report is available at: http://njcitizenaction.org/.