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.

And the deals that are being closed on most car lots are not pretty ones. Disadvantaged car buyers often pay interest rates between 17 and 25 percent on auto loans, compared to single-digit rates for borrowers with good credit and strong bargaining skills -- a difference that can mean $3,000, $4,000 or more in extra finance charges on a $10,000 used-car loan. These customers are also more likely to be targeted by dealers and lenders for an array of overpriced extras: credit insurance, roadside assistance plans, extended warranties, service contracts.

Big and Bad

In step with the Wall Street-fueled growth of high-cost auto financing has come the dominance of what Ward's Dealer Business magazine calls "megadealer" groups -- vast, often publicly traded chains of dealerships that sway market trends and set the tone for ground-level sales practices. The nation's three largest megachains -- AutoNation, UnitedAuto Group, and Sonic Automotive -- posted $34 billion in sales in 2002, almost one-third of combined sales for the Ward's top 100 dealer list. The big three's growth and profits have been accompanied by lawsuits, government investigations, even criminal prosecutions. AutoNation, UnitedAuto, and Sonic have been flogged by allegations that they use deceptive practices to overcharge customers on financing, insurance, and other items.

Sonic has been the target of a Florida attorney general's probe, a Dateline NBC expose and an onslaught of private litigation. Lawsuits have alleged Sonic executives supervised a scheme to falsify credit applications, sell overpriced warranties, and forge customers‚ signatures. One customer, Mac Williams Jr., told Tampa's WFLA-TV, "On one of the documents they had even misspelled my name, which sort of upset me. If you're gonna forge my name, at least spell it right."

A Florida class action lawsuit involving an estimated 10,000 to 25,000 customers alleges that overcharges and other misdeeds are standard procedures at Sonic -- a pattern of conduct perpetrated by local salespeople and managers but choreographed by high-level corporate officials. The suit claims that Sonic executives controlled lower-level employees with top-down specificity, fostering predatory conduct through a system of bonuses and kickbacks coupled with the threat of firing, demotion, or transfer for managers who didn't comply.

The suit says executives demanded weekly "penetration reports" on sales of insurance add-ons, and set a goal that finance managers pack on $800 of "back-end" products such as anti-theft insurance onto each sale-a benchmark the lawsuit says Sonic executives knew "could only be achieved through fraudulent sales practices."

When Enrique and Virginia Galura purchased a new Toyota Spyder, the suits says, Sonic's Clearwater Toyota charged them $562 for an anti-theft insurance policy whose real price was $30. The $562 was not disclosed on the insurance form, the suit says, but was handwritten in after the couple drove off the lot. Another Sonic customer, Ana Diaz-Albertini of Palm Harbor, Fla., was charged $1,140 for the insurance -- which paid only $1,000 in the event of theft and damage and $2,500 in the event of theft and total loss. Sonic officials said they investigated allegations of misconduct and found just one infraction, which they responded to by firing the employee in question. A company spokesman told the Associated Press that Sonic was committed to "operating our business with the utmost integrity" and taking prompt action whenever "inappropriate conduct" is brought to its attention.

The No. 1 megadealer, Fort Lauderdale, Fla.-headquartered AutoNation, was forced to make similar denials of wrongdoing in the wake of a scandal at its El Monte, Calif., Chevrolet dealership. AutoNation agreed to pay more than $5 million to settle a private class action and a California Department of Motor Vehicles lawsuit accusing the dealership of defrauding more than 1,500 customers through a variety of sharp practices, such as selling used cars as new and charging for security systems that were never installed. Seven employees were convicted of crimes in the case. AutoNation blamed any violations on a handful of unprincipled employees. "You've got human beings who are going to act like human beings act," a spokesman said. "Some guys break the rules and these guys did."

UnitedAuto Group, meanwhile, was the target of a lawsuit in Memphis that accused a UAG Toyota dealership of preying on women and minorities by secretly marking up their finance charges beyond the interest rates quoted by lenders. The state judge who approved class action status for the case wrote that the so-called "dealer-reserve fee" results "in higher interest rates, higher monthly payments and higher total finance charges to the customer and is not disclosed to the customer at any time." Company officials recently told CBS's 60 Minutes that they had reached a tentative settlement of the lawsuit.

Target Practice

The dealer-reserve hustle works this way: The dealer takes the customer's application, submits it to a lender, and the lender comes back with its "buy rate." For someone with a mediocre credit history, the lender's rate might be, for example, 9 percent. But the dealership doesn't tell the customer that. Instead, it quotes a much higher rate -- say 12 percent. The difference is the finance "markup." On a $14,000 used-car loan, hiking the rate from 9 to 12 could cost the consumer more than $1,200. Critics call it a kickback -- the lenders' way of enticing dealers to steer loans in their direction.

Experts hired by the National Consumer Law Center and private consumer attorneys have found hard evidence that minority borrowers often bear the brunt of these charges.

One study looked at 1.5 million GMAC loan transactions and found 53.4 percent of blacks paid markups, compared to just over 28 percent of whites. The disparity couldn't be explained by differences in creditworthiness. On average, African Americans paid more than two times the markup as whites -- with a markup of $656 for blacks and $242 for whites. Similar patterns emerged in a study of 300,000-plus Nissan Motor Acceptance Corporation loans. Black Nissan borrowers paid an average markup of $970, compared to $462 for whites. Nissan called that statistical analysis "junk science." However, the company agreed to pay a $7.6 million settlement covering attorneys‚ fees, contributions to consumer education, and $60,000 divided among 10 main plaintiffs. It also promised to make 675,000 no-markup loans to Latino and African-American car buyers. Michael Terry, a Nashville consumer attorney who has helped lead the legal attack on markups, says discriminatory intent by the dealers and lenders is the only explanation for the disparities. Victims include black lawyers and doctors.

"When they get out of the car with a black face ... they become a target," Terry says. "We've talked to dealers and they tell us it's true. They joke about them having a target on their backs."

Michael Hudson is investigative editor for Southern Exposure.

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