A recent FTC settlement with a Maryland-based auto dealership exposes a business practice that can increase costs for unsuspecting car buyers and be used to discriminate against minority borrowers.
The Federal Trade Commission announced a $3.38 million proposed settlement on Tuesday with Passport Automotive Group, which owns car dealerships around the D.C. area. The agency had accused the company of deceiving consumers by imposing illegal junk fees and discriminating against Black and Latino customers through higher financing costs and fees. Second Hand Car Sites
On the issue of junk fees, the FTC said Passport marketed certain used cars as “certified” or “inspected.” But when a customer came to buy the vehicle at the advertised price, the dealer added hundreds or thousands of dollars in fees falsely characterized as “required,” the FTC said. In one case, the buyer of a certified pre-owned 2018 Nissan Rogue advertised for $24,050 was charged an additional $2,390 in illegal fees for reconditioning and certification, according to the FTC complaint.
In many instances, auto manufacturers specifically prohibit dealers from charging separately for certification costs, the agency said.
“Passport does not tolerate behavior that violates customer trust, and the company took swift action upon learning that some customers were charged redundant fees,” the company said in an emailed statement.
In its defense, the dealer said, “an internal investigation determined that violations were largely isolated to a group of three employees, and those employees are no longer part of the organization.”
Okay, fine. But what about the other charge of an unfair lending practice?
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Part of the settlement involves a “markup,” an industry practice that needs a lot of sunshine.
Applied unevenly, even when borrowers are similarly creditworthy, it shows how discrimination can thrive and be profitable.
Here’s how it works.
Dealerships often arrange financing for car buyers. In such a process, the dealer submits an application to one or more lenders on behalf of a consumer. A lender, taking into account the potential buyer’s credit history and other information, such as income and length of the loan, will approve the loan for a certain annual percentage rate known as the “buy rate.''
Stick with me on this, because you need to know this if you choose to take dealer financing.
In some circumstances, depending on its policies, the auto lender can permit the dealership to add a finance charge to the buy rate. This is the “markup.”
So, unbeknownst to many borrowers, the dealership may decide to increase the buy rate for no other reason than that it can. For example, a customer’s buy rate might be 5 percent, but the dealer might tell a consumer he’s been approved for a 7 percent loan.
The dealer doesn’t tell you the buy rate, only the final contract rate for the loan, which equals the buy rate plus the markup, the FTC points out. It’s important to note that the markup isn’t related to any credit issue with the borrower, the agency said in the complaint against Passport.
Dealers claim markups are legitimate compensation for helping to arrange the loans.
Here’s where this practice can be discriminatory.
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According to the FTC, Passport’s discretionary use of markup rates resulted in higher loan rates for some Black and Latino consumers when compared with loans offered to White consumers.
Passport has a policy of charging a markup of 2 percent but gives employees discretion to reduce or eliminate it for certain reasons, such as the consumer has a more competitive credit offer, the FTC said in its complaint.
Black consumers received the maximum Passport-allowed markup approximately 47 percent more often than White ones, the FTC said. For Latino consumers, it was 38 percent more often.
The agency said Passport received letters from a finance company — one in June 2019 and another in June 2020 — pointing out a statistically significant difference in the markup rates charged to Black borrowers.
The auto dealer denied it discriminates.
“Passport refutes those allegations in the strongest possible terms, but making this case in court would have required a multi-year, multi-million-dollar legal battle that ultimately would have distracted us from the important work we do,” the company said.
A markup shenanigan nearly happened to me at a different Maryland dealer long ago when I used to finance my car purchases. I pay cash now.
A salesman submitted my credit application for an auto loan. I didn’t tell him I had already shopped around and had a loan offer from my credit union. I just wanted to test what the dealer would offer me — a Black woman — in the way of a loan quote.
I had been reporting on charges of dealer discrimination in a two-tier loan pricing system that penalizes Blacks and Latinos who were creditworthy but were quoted higher financing rates. My credit union quoted me a rate befitting my exceptional credit history. On the FICO credit scoring model of a low of 300 to a high of 850, I was in the high 700s. My current credit score is a perfect 850.
At the time, the average rate for a used-auto loan was about 5 percent.
The salesman said the lender came back with a rate of 10 percent.
“That’s awfully high,” I protested.
He countered by suggesting I had some issues with my credit.
What I thought next is not fit to print.
The auto dealer was counting on two things — that I would be unaware of my great credit score and that I wouldn’t bother to shop around for a better loan rate. For as long as I’ve been writing this column, there have been lawsuits and reports of racial discrimination in car lending.
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Part of the FTC settlement with Passport requires each dealership location to charge no financing markup or charge the same markup rate to all consumers. The agency said it plans to use the settlement funds to provide refunds to consumers.
“This is the third case in recent years where we’ve acted to protect consumers from discrimination in the auto marketplace,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection. “Buying a car is one of the most significant purchases a consumer will make, and they deserve protection from hidden junk fees and discriminatory practices.”
With inflation at a 40-year high and supply chain issues still plaguing the car industry, pushing up the prices of used and new cars, you must shop around for your financing. Look out for a hidden markup on your auto loan. And most assuredly, you need to shop around for loan rates, especially if you’re a minority car buyer.
If you have a personal finance question for Washington Post columnist Michelle Singletary, please call 1-855-ASK-POST (1-855-275-7678).
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