FTC settles with car dealership accused of unfair loans to blacks and Latinos
On the issue of junk fees, the FTC said Passport is marketing certain used products cars as “certified” or “inspected”. But when a customer came to buy the vehicle at the advertised price, the dealership added hundreds or thousands of dollars in fees falsely labeled as “required,” the FTC said. In one case, Buyer of a Certified Pre-Owned 2018 Nissan Rogue advertised for $24,050 was charged a An additional $2,390 in illegal fees for repackaging and certification, according to the FTC complaint.
In many cases, automakers specifically prohibit dealerships from charging certification costs separately, the agency said.
“Passport does not tolerate behavior that violates customer trust, and the company took prompt action after learning that some customers were charged redundant fees,” the company said in an emailed statement.
In its defense, the dealership said that “an internal investigation determined that the violations were largely isolated to a group of three employees, and that those employees are no longer part of the organization.”
OK very good. But what about the other accusation of unfair lending practice?
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Part of the settlement involves a “markup,” an industry practice that needs plenty of sunshine.
Applied unevenly, even when borrowers are equally creditworthy, it shows how discrimination can thrive and be profitable.
Dealerships often arrange financing for car buyers. In such a process, the dealer submits an application to one or more lenders on behalf of a consumer. A lender, taking into account the potential buyer’s credit history and other information, such as income and loan term, will approve the loan at a certain annual percentage rate called the “purchase rate.”
Stick with me on this, because you need to know this if you choose to take out dealer financing.
In certain circumstances, depending on its policies, the auto lender may allow the dealership to add a finance charge to the purchase rate. This is the “markup”.
So, unbeknownst to many borrowers, the dealer may decide to increase the purchase rate for no other reason than that. For example, a customer’s purchase rate may be 5%, but the dealership may tell a consumer that they have been approved for a 7% loan.
The dealer doesn’t tell you the purchase rate, only the final contract rate for the loan, which is equal to the purchase rate plus the markup, the FTC points out. Importantly, the markup is not related to any credit issues with the borrower, the agency said in the lawsuit against Passport.
The dealers say the markups are legitimate compensation for helping arrange the loans.
This is where this practice can be discriminatory.
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According to the FTC, Passport’s discretionary use of mark-up rates resulted in higher loan rates for some black and Latino consumers compared to loans offered to white consumers.
Passport has a policy of charging a 2% markup but gives employees the discretion to reduce or eliminate it for certain reasons, such as the consumer has a more competitive credit offer, the FTC said in its complaint.
Black consumers received the maximum markup allowed by passports about 47% more often than whites, the FTC said. For Latino consumers, it was 38% more often.
The agency said Passport had received letters from a finance company — one in June 2019 and another in June 2020 — pointing to a statistically significant difference in mark-up rates charged to black borrowers.
The car dealership denied that it was discriminating.
“Passport refutes these allegations in the strongest possible terms, but bringing this matter to court would have required a multi-year, multi-million dollar legal battle that would ultimately distract us from the important work that we do,” he said. said the company.
A markup shenanigan almost happened to me at another dealership in Maryland a long time ago when I was financing my car purchases. I pay cash now.
A salesperson filed my credit application for a car loan. I didn’t tell him that I had already shopped around and had received a loan offer from my credit union. I just wanted to test what the dealer would offer me – a black woman – as a loan quote.
I had reported accusations of dealer discrimination in a two-tier loan pricing system that penalized blacks and Latinos who were creditworthy but had higher financing rates. My credit union offered me a rate that matched my outstanding credit history. On the FICO credit score model of a low of 300 to a high of 850, I was in the high 700s. My current credit score is a perfect 850.
At the time, the average rate for a used car loan was around 5%.
The seller said the lender came back with a 10% rate.
“That’s awfully high,” I protested.
He countered by suggesting that I had problems with my credit.
What I thought next is not suitable for printing.
The car dealership was counting on two things: that I wouldn’t know about my excellent credit score, and that I wouldn’t bother shopping around for a better loan rate. Since I wrote this column, there have been lawsuits and reports of racial discrimination in the area of auto loans.
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Part of the FTC settlement with Passport requires that each dealership location not charge any financing markup or charge the same rate of markup to all consumers. The agency said it plans to use the settlement funds to reimburse consumers.
“This is the third instance in recent years where we have acted to protect consumers from discrimination in the automotive marketplace,” said Samuel Levine, director of the FTC’s Consumer Protection Bureau. “Buying a car is one of the most important purchases a consumer will make, and they deserve protection from hidden charges and discriminatory practices.”
With inflation at its highest level in 40 years and supply chain issues still plaguing the auto industry, driving up prices for used and new cars, you need to shop around for your financing. Pay attention to the hidden margins on your car loan. And definitely, you need to shop around for loan rates, especially if you’re a minority car buyer.