FEBRUARY 2005

Settlements in Auto Loan Pricing Suits

In late January, four lenders accused of discriminatory auto finance practices settled class-action lawsuits. American Honda Finance Corp., Bank of America Corp., the Bank One unit of JPMorgan Chase & Co., and U.S. Bancorp were accused of allowing car dealers to charge higher annual percentage rates on auto loans to black consumers than white consumers with similar credit histories.

When car buyers secure financing through the car dealer, the contract interest rate often includes a "mark up" over the wholesale interest rate offered to the dealer by the ultimate lender. Car dealers are able to keep some or all of the difference. However, the lawsuits alleged that the markups were not solely attributable to differences in creditworthiness, and that race played a role.

In separate settlements, the four lenders agreed to lower the limit on dealer markups and to include disclosures in their loan contracts stating that interest rates are negotiable and that dealers can receive profits in the form of a share of the finance charges when they arrange financing for buyers. The details of the agreements are as follows:

Bank of America, Bank One, and U.S. Bancorp agreed to:

• Cap markups at 2.5 percentage points on loans up to 60 months
• Cap markups at 2 percentage points on loans from 61 to 71 months
• Cap markups at 1.75 percentage points on loans of 72 or more months

• Bank of America will offer 600,000 "pre-approval, no-markup loans" to black and Hispanic consumers
• Bank One will offer 875,000 pre-approval, no-markup loans
• U.S. Bancorp will offer 300,000 pre-approval, no-markup loans
• The banks agreed to contribute to consumer education initiatives

• Cap markups at 2.25 percentage points on loans up to 60 months
• Cap markups at 2 percentage points on loans over 60 months
• Offer 625,000 pre-approval, no-markup loans to black and Hispanic consumers
• Contribute $900,000 to "consumer assistance initiatives"

Over the past couple of years, lenders such as General Motors Acceptance Corp. and Nissan Motor Acceptance Corp. have settled similar suits while still other lenders have agreed to incorporate similar disclosures in their loan contracts and to contribute to consumer education programs.

As of 2004, the industry standard for markup caps was 3 percent. However, there are more markup lawsuits pending and plaintiffs' attorneys have indicated that their goal is the elimination of variable markups as compensation to dealer, to be replaced by a flat fee.