Loan Mark-ups Come Under Increasing Scrutiny

Loan markups, long an important part of the auto dealership’s bottom line, are coming under increasing scrutiny amidst charges of deception and discrimination.

Such markups are legal and commonplace in the industry and the practice is estimated to generate $75,000 per month for a large dealership.

The practice is believed to cost consumers up to $1 billion annually.

The average deal markup ranges from 1 to 3 percent, according to some estimates, with even higher rates charged customers with questionable credit histories. Some dealers work with lenders in creating the markup package.

The practice of marking up loans has not been widely known by consumers. Class-action lawsuits have been filed in recent years alleging that some dealers typically charge higher rates for Blacks and Hispanics than other customers, regardless of their credit rating.

A study by a Vanderbilt University professor estimates that African-American customers paid average markups nearly 42 percent higher than other customers.

California voters adopted a Car Buyers Bill of Rights, effective July 1, 2006, that limits dealer markups from lenders to 2.5 percent for loans up to 60 months or 2 percent for longer periods.

The new law also requires that dealers provide customers a written copy of their credit scores that will be used to calculate their loans. On another front, Ford and General Motors have capped their loan markups at 2.5 percent.

The National Automobile Dealers Association has encouraged its 20,000 members to disclose that markups are negotiable and that dealers retain some of the profit from the markup.

What should an auto dealer do in this litigious climate to minimize the risk?

Scrutinize your loan markup practices for any unintentional discrimination in the form of higher rates charged one group over another.

Longer-term, look for ways to reduce your reliance on loan markups as a source of revenue to protect yourself from unwanted association with a practice most people are unaware of and some have suffered financially from.