By Rob Johnson
Staff Writer

Lending unit says class-action case based on bad data

The lending arm of Ford Motor Corp. routinely charges higher fees to blacks, Hispanics and other minorities across the country for reasons that have nothing to do with creditworthiness, attorneys argued in a Nashville courtroom yesterday.

A federal class-action trial about whether Ford affiliate Primus Automotive Financial Services Inc. discriminates against its minority customers promises to examine the behind-the-scenes practices that drive car-loan rates.

The bench trial before U.S. District Judge Aleta Trauger started yesterday and will focus on the Franklin-based auto-lending giant that is marketed as Ford Credit, Mazda American Credit, Land Rover Credit and Jaguar Credit.

The plaintiffs claim that Primus is charging higher fees, or markups, to minorities nationwide, irrespective of any business costs or credit risks the customers may pose. Primus counters that it does not discriminate and that the plaintiffs base their case on analysis that draws misleading conclusions from too few sets of data.

Rather, Primus says, its decisions are driven by race-blind credit ratings, and they are confident they will prevail in the public airing of a legal case that began in 2002.

Primus is going to trial after similar markup lawsuits alleging racial discrimination against Nissan Motors Acceptance Corp. and General Motors Acceptance Corp. were settled. American Honda Finance Corp. has reached a tentative settlement that is awaiting court approval.

In opening arguments yesterday, the details of plaintiff Larry Mitchell's purchase of a 2001 Mazda Protege were rendered on a giant screen in Trauger's courtroom.

Plaintiffs' attorney Clint Watkins explained the two components that lenders use to figure the customer's annual percentage rate, APR, on the car loan. Part of it is the buy rate, which factors in elements such as the customer's credit score. The other part of the APR is the markup.

For Mitchell's Mazda, the buy rate would have produced a $514 monthly payment but, with the markup added into the loan, it came to $567, producing a $3,200 difference in finance charges over the cost of the loan.

People of all races can be subject to markups, Watkins told the court, ''but the problem here is that it falls more heavily on African-Americans.''

Watkins argued that markups can be a lucrative source of profit when split between dealers and lenders.

The plaintiffs' experts contend that Primus essentially engages in price gouging — and does so because it can get away with it. The markups represent subjective pricing, the plaintiffs allege. While markups are not illegal, they hit minorities harder, making them discriminatory, the plaintiffs charge.

They argue that the dealers and Primus do not disclose, as some lenders do, the factors that go into setting the customer's APR.

''Lack of transparency creates lack of information,'' Yale University economist Ian Ayers testified. The plaintiffs' expert said that the lack of information diminishes competition, because consumers cannot see and compare everything that goes into pricing an auto loan.

Primus attorney Thomas M. Byrne told the judge that the 2001-04 data the plaintiffs are using to state their case is incomplete.

He argues that the data don't reflect crucial details such as trade-in prices, initial offers, negotiating skills and extended warranty costs.

Furthermore, the coding in the data indicates the borrowers' race in only 15 states.

He plans to put on proof that shows the likelihood an African-American will get a higher rate than a white customer is ''basically a coin flip.''

If there is a disparity in lending, he added, it takes place at the dealer level, not with Primus.

The case promises to be largely a duel between opposing economists and statisticians. The plaintiffs are seeking attorneys' fees and an injunction from Trauger to force Primus to change its lending practices.