Driven to Misery

Addie Coleman had some blemishes on her credit history when she went in to buy a car from Beaman Pontiac in Nashville. The dealership faxed her loan application to General Motors Acceptance Corp. GMAC weighed the information and came back with a decision: Coleman qualified for an annual percentage rate of 18.25. But that's not the APR the dealership wrote into the contract it presented to her. Instead, it boosted the already steep rate approved by GMAC by another 2.5 points, to 20.75.

It was, according to Coleman's attorneys, a secret markup that over the life of the loan would cost her an extra $809 in finance charges. And her experience wasn't an isolated one. According to a federal class-action lawsuit, other GMAC customers around Nashville were secretly assessed finance-charge markups of $5,501, $6,018, even $8,600. The lawsuit claimed these borrowers and many thousands like them were victims of a shady, lucrative arrangement between GMAC and dealers that soaks African American and Hispanic borrowers with covert costs that have nothing to do with their creditworthiness.

Profits and Ingenuity

Most people understand that buying a car is an enterprise fraught with perils. But few realize that the all-too-common traps and rip-offs of the car business are no longer simply the folkways of a decentralized assortment of local or fly-by-night operators. The industry's unwholesome habits have become, instead, institutionalized practices fueled by top-down market forces and corporate ingenuity.

GMAC, for example, is one of a plethora of name-brand financiers that have been accused of working with auto dealers to gouge millions of minority car buyers. Others include units of Nissan, Toyota, Ford and Honda. Industry officials deny wrongdoing is pervasive. "We're in a dangerous place when we start using behavior of a few people to implicate an entire industry," Marianne McInerney, president of the American International Automobile Dealers Association, told the Associated Press. She says the vast majority of dealers are reputable and honest and that surveys show consumers are "over 90 percent satisfied" when they buy new vehicles. GMAC has agreed to a settlement of the nationwide class action over its loan-markup policies. But it, too, denies wrongdoing and says it "adheres to a zero-tolerance policy on racial discrimination." Industry denials are undermined, however, by a growing body of evidence that discrimination and fraud are systematic -- and driven by some of America's biggest companies.

A new study by the Consumer Federation of America concludes major banks and automakers' finance units use hidden interest markups to fleece consumers out of as much as $1 billion a year. Virtually all of the nation's top auto lenders engage in this practice, the study says. A study by another national consumer advocacy group, Public Citizen, provides an even wider window on the industry's unsavory deportment: "Customers in California, Florida and at least 37 other states have been defrauded by what the Minnesota Attorney General's Office has called "industry-wide practices‚ ranging from inflating the cost of warranties to contract stuffing and racial discrimination."

The report says little-noticed "extra" charges are tacked on at every stage of the sale, producing little value to the consumer but enriching dealers to the tune "of millions, and even perhaps billions, of additional dollars industry-wide." Given the car industry's predilections, all consumers -- rich or poor, black or white, good credit or bad -- should be wary when they step onto an automobile lot. But the evidence shows the worst abuses are usually targeted at African American, Hispanic, elderly, blue collar, or credit-impaired customers. Many dealers and lenders perceive these consumers as having fewer options, less financial experience, and a diminished sense of marketplace entitlement, thus making them more likely to be desperate or susceptible when it comes time to close the deal.