When a 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 based on an 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 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 in writing by a corporate representative.
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.
WFS is a bank that is neither owned by or affiliated with an automobile manufacturer
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 creditworthiness. 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 creditworthiness
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 Lee v. WFS, a Federal District Court in Nashville, Tennessee,
ordered data production that 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 Lee v. WFS and Thompson v. WFS about?
The plaintiffs in these cases contended that African Americans and Hispanics
who financed automobiles through WFS paid higher prices for credit because they
received higher markups. The plaintiffs contended that as a result of markup
pricing, WFS discriminated against African Americans and Hispanics as a class.
In Lee v. WFS, the plaintiffs filed their claims under the ECOA in
the Federal District Court in Nashville, Tennessee. The case of Thompson
v. WFS was brought in California Superior Court under comparable state
law. The proposed settlement resolves both lawsuits.
11. Have the Cases of Lee v. WFS and Thompson v. WFS Been Settled?
Yes. The cases were settled June, 2004 and a settlement agreement was filed
August, 2004. On August 27, 2004, the U.S. District Court in Nashville, Tennessee,
gave preliminary approval to the proposed settlement. Any objections to the
settlement must be served, pursuant to instructions appearing on the Notice
of Proposed Class Action Settlement so that they are received on or before November
1, 2004. On November 15, 2004, at 1 p.m. the Court will consider the final approval
of the proposed settlement agreement. Copies of all of the relevant settlement
documents and disclosures, including the Notice of Proposed Class Action Settlement
can be found at www.ecoa-settlement.com
or can be obtained by mail by contacting the National Consumer Law Center.
12. What are the Major Terms of the Settlement Agreement?
WFS has agreed to do the following:
a. Limit the amount of markup on future automobile loans [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 refinancing of certain Qualified Loans at one-percentage point
lower than the existing APR interest rate loan, up to a limit of One Billion
Dollars of WFS’s current outstanding loan portfolio.
13. What are Qualified Loans that may be offered the opportunity to be refinanced?
Qualified Loans mean current WFS accounts which (i) according to WFS’s
records have been marked up; (ii) where the borrower currently has the same
or better credit rating as at the time the original loan was made; and (iii)
are identified by WFS based upon census tract data as likely African American
and Hispanic American borrowers.
14. What is the cost of refinancing Qualified Loans?
WFS will not charge any cost to borrowers in connection with the offers to
refinance. Refinancing shall be without prepayment penalty regardless of the
original contract terms. Offers to refinance shall not extend the loan term,
unless requested by the borrower and then at the discretion of WFS. Borrowers
should independently determine if the refinancing is in their own best interests.
15. How Can I Receive a Refinancing Offer from WFS
If you are a current African American or Hispanic WFS customer, you may receive
a Refinancing Offer without doing anything. WFS will be examining its customer
records for African Americans and Hispanics who are eligible for refinancing
and mailing Refinancing Offers directly to them.
16. What if I Have Individual Claims for Damages Against WFS?
In two previous cases brought in the U.S. District Court in Nashville, Tennessee
against NMAC and GMAC alleging the same causes of action, the plaintiffs 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 in the Lee v. WFS
case sought only future relief and individual claims for damages against WFS
were excluded from the case and the settlement. Therefore, you may accept the
benefits of the Refinancing Offers and markup caps on future credit transactions
without waiving any of your personal claims or releasing WFS from any potential
liability for damages. In order to recover such damages, however, you will have
to bring your own case against WFS.
