By LEE HAWKINS JR.
Staff Reporter of THE WALL STREET JOURNAL
Three banks and Honda Motor Co.'s automotive-financing arm have reached separate settlements with black consumers who filed class-action lawsuits accusing the lenders of discriminatory auto-lending practices.
Under the settlements, J.P. Morgan Chase & Co.'s Bank One unit, Bank of America Corp., U.S. Bancorp and American Honda Finance Corp. have agreed to set tighter caps on the amount that car dealers can increase the interest charges on car loans. In addition, the four lenders have agreed to offer car loans with no markups to as many as 2.4 million minority consumers.
The settlements mark the latest in a series of agreements by major auto lenders to set tighter limits on the extra interest charges that car dealers can tack on to consumer car loans. Laws in most states allow car dealers to charge consumers a higher interest rate for a car loan than the lending bank would charge, based on the consumer's credit score.
Dealer Profit at Stake
Such loan markups are an important source of dealer profit. But lawyers representing groups of minority plaintiffs have attacked the practice, charging it enables discrimination against minority consumers. A study used by the plaintiffs in a similar recent suit found that African-American car buyers paid loan markups averaging $1,229 each. The average for white car buyers with similar credit histories was $867 a loan.
In each case, the big financial institutions have denied any wrongdoing, but have agreed to put tighter limits on the markups dealers can impose above the interest rates set by the lenders, according to court documents detailing the settlement terms. They also have agreed to establish special lending programs that will offer billions of dollars in "no-markup loans" to blacks and Hispanics, among other things.
Before the settlement, the three banks allowed dealers to tack on as much as three percentage points to the annual percentage rate the banks quoted, based on the consumer's creditworthiness.
In the settlement, the banks each agreed to a similar three-step method of limiting markups. Each of the banks agreed that, on bank loans of up to 60 months, markups will be capped at 2.5%. The markup on loans with terms between 61 and 71 months will be capped at 2%, and loans with terms of 72 months or more will have markup caps of 1.75%.
Each of the banks also agreed to implement affirmative-lending programs that will require them to offer "preapproval, nomarkup loans" to African-Americans and Hispanics. Under such arrangements, auto lenders try to identify the race of potential applicants using ZIP codes or various databases that contain the details of previous loans they have issued. Once the race is established, the lender can send an offer of credit to the potential applicant. The offer discloses the annual percentage rate that the applicant qualifies for, which can't then be marked up at a dealership.
U.S. Bancorp plans to offer 300,000 preapproval, no-markup loans to African-Americans and Hispanics. Assuming a typical car loan of $20,000, U.S. Bancorp is required to offer about $6 billion in no-markup loans to minorities. Bank One will offer 875,000 similarly structured loans to minorities, which could be valued at about $17.5 billion. Bank of America agreed to offer 600,000 of the loans, valued at about $12 billion. As part of the settlement, the banks also agreed to each make monetary contributions to "nonprofit groups for the purpose of consumer education."
The settlement terms with American Honda, which once allowed dealers to inflate interest rates that American Honda would offer consumers by as much as 3.5%, were only slightly different. In the settlement, American Honda agreed to impose markup caps of 2.25% on loans of up to 60 months, and caps of 2% on loans of more than 60 months.
The loan contracts of the banks and American Honda also will contain disclosures that plainly state that the annual percentage rate is negotiable and that dealers retain the right to receive a part of the finance charges.
American Honda also agreed to contribute $900,000 to "consumer assistance initiatives" set forth by groups such as Rev. Jesse Jackson's Rainbow/PUSH Coalition and the National Urban League. Among other things, American Honda will offer up to 625,000 preapproval, nomarkup loans to blacks and Hispanics.
Other lenders have been targeted by bias suits on this issue, including General Motors Acceptance Corp., General Motors Corp.'s finance arm; and Nissan Motor Acceptance Corp., the U.S. finance arm of Nissan Motor Co. GMAC and NMAC reached settlements with African-American plaintiffs in 2004 and 2003, weeks before they were set to appear in court. Dealers haven't been named in any of the suits.
Write to Lee Hawkins Jr. at firstname.lastname@example.org
By LEE HAWKINS JR.