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Archive for Monday, February 23, 2004

GM settlement opens door to better disclosure practices

February 23, 2004

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I hope that a recently proposed class action settlement with one of the nation's largest auto lenders will bring about greater disclosure in how dealerships nationwide handle the car loans they arrange.

The settlement in question involves a lawsuit filed against General Motors Acceptance Corp. At issue were accusations that the finance firm allowed dealers to charge interest rate "markups" to black and Hispanic customers more frequently, and at significantly greater rates, than similarly situated white customers.

Markups are a legal way for dealers to earn extra profit by imposing a higher interest rate on loans above what a lender might quote to them for a particular customer's loan contract. Dealers claim markups are legitimate compensation for helping to arrange the loans.

In settling the lawsuit, GMAC did not admit any wrongdoing and maintained it does not discriminate.

Industry should take note

One of the best outcomes of a class action lawsuit is that it can dramatically change how an industry operates. Other lenders and dealers may very well be forced to disclose more about vehicle financing because of the GMAC settlement.

In fact, consumer advocacy groups say that was one of their intentions in filing against GMAC and other auto lenders. There have been close to a dozen class-action complaints filed in federal courts around the country involving dealer markups.

"We will continue to advocate further changes in credit pricing by other lenders in this industry seeking to provide further relief and more disclosure in order to ensure that all consumers are treated fairly," said Stuart Rossman, counsel for the National Consumer Law Center, and one of the lawyers representing class members in the GMAC case.

One of the most important provisions in the GMAC settlement is an agreement by the company to include on its contract forms a statement that the annual percentage rate (APR) may be negotiable, and that the dealer may receive a portion of the finance charge paid by the customer.

"We think this is an example of our exercising some leadership in this area," said Greg Merryman, an attorney for GMAC.

The disclosure statement GMAC plans to use will be in bold font and 10-point type. The clause has to be on the front side of the loan contract near the customer's signature line, according to the settlement.

Here's what else GMAC has agreed to do:

  • Impose a 2.5 percentage point markup cap on loans with terms up to 60 months, and a cap of 2 percentage points on extended term loans. GMAC currently has a 3 percentage point cap on markups.
  • Create a credit program designed to provide minority car buyers with special rate financing. The credit program follows a similar program that Nissan Motor Acceptance Corp. currently is implementing under the terms of a settlement reached last year in a similar lawsuit brought by the same group of lawyers involved in the GMAC case.
  • Contribute $1.6 million toward programs aimed at educating and assisting consumers.
  • Launch a Diversity Marketing Initiative, which will include offering preapproved credit to 1.25 million African-American and Hispanic customers throughout the United States.

Building trust

When it comes to auto loans, consumers deserve full disclosure, especially since buying a car today is a major purchase involving big money.

In fact, three trade associations representing dealers and auto lenders released a statement after announcement of the GMAC action, calling for dealers to voluntarily disclose that consumers can negotiate the annual percentage rate when they buy a car from a dealership.

The American Financial Services Assn., the Consumer Bankers Assn. and the National Automobile Dealers Assn. (NADA) said they also support disclosing that a dealership may receive a part of the finance charge or other compensation for arranging financing.

"Our goal is to continue to build consumer trust," NADA's chairman, Charley Smith, said in a release. "And to do so, we must, as an industry, recognize the need for greater transparency in dealer-assisted financing."

Ultimately, transparency in these loan contracts is good for all involved.

"The more a consumer knows about auto financing the more likely they are to be satisfied with the transaction," said David Hyatt, NADA's executive director of public affairs.

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