NEW YORK (CNN/Money) - Auto dealers financing cars through a division of Ford Motor Credit have been discriminating against African-American and Hispanic customers by charging them higher interest rate mark-ups than others, according to an announcement by the Consumer Federation of America.
The interest rate mark-up is an amount that is added by the dealership onto the interest rate that is charged by the financing company or bank.
Following recent high-profile legal cases and consumer complaints about interest rate mark-ups, several auto financing companies placed limits on the amount of dealership mark-ups.
Primus Automotive Financial Services and Primus Financial Services, part of Ford Motor Credit, in March 2003 limited dealership mark-ups to three percent and then subsequently cut the limit to 2.5 percent. Previously the limit had been five percent.
Stricter limits helped close the mark-up gap but there was still a substantial difference, according to a study by Mark Cohen of Vanderbilt University, on which the Consumer Federation of America based its release.
Primus also offers auto financing services to dealerships selling vehicles not made by Ford Motor Company.
Overall, African-American borrowers paid 1.8 times the amount of money in mark-up charges compared to what white customers typically paid, according to the study.
White customers were also charged the mark-up less often than blacks or Hispanics, according to the study. About forty percent of white customers were charged a dealer mark-up on financing while about 58 percent of Hispanic borrowers and about 63 percent of African-American borrowers were charged a mark-up.
The amount of the dealership mark-up, or whether one is charged, is decided by the auto dealers, not by the lending institution, said Meredith Libbey, a spokeswoman for Primus.
Loan terms are often negotiated with the customer before the loan is presented to several financing companies who compete to provide the actual financing.
Primus has changed the language on its contracts to more clearly explain that loan terms are negotiable, Libbey said.
One solution that the CFA and other groups have suggested is the introduction of a flat fee.
That might create unintended problems for less creditworthy customers, however, said Libbey. With a flat fee, dealerships might have less incentive to work hard to find financing options for those customers, she said.
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