MARCH 2004

GMAC Settles Auto Loan Markup Lawsuit

General Motors Acceptance Corp (GMAC) has announced a tentative settlement of a class-action lawsuit that accused the company and its dealers of loan price discrimination against African American customers. The dispute involved the common practice in the indirect auto financing business of allowing dealers to keep some portion of the finance charge that they negotiate with customers as compensation for originating the loan. The plaintiffs used an analysis of loan records as empirical support for their argument that GMAC dealers took advantage of African American customers by systematically charging them more on loans than was the case with white borrowers of similar risk.

As part of the settlement, GMAC agreed to cap the markup it allows dealers to charge at 250 basis points over the base rate at which it agrees to purchase the dealer-originated paper. Previously, the cap had been set at 300 basis points. A story in the American Banker reported that up until 2001 GMAC shared the markup income with its dealers, but since then dealers have been the sole beneficiaries.

Stuart Rossman, an attorney with the National Consumer Law Center, told the Wall Street Journal that he estimates consumers will save $60 million annually as a result of the agreement. He remarked, "The cap reduction is highly significant. It provides a benefit for all consumers and our studies have indicated that when you reduce the discretion available to dealers to mark up the interest rate, there is a reduction in the discriminatory disparity."

How big was the disparity? On January 26, 2004 the Consumer Federation of America released a study that found that whites paid an average markup of $244 per loan, compared to $656 paid by blacks.