Black customers are much more likely than white buyers to be charged markups on loans financed by American Honda Finance Corp., according to a study done for minority borrowers who have sued the auto lender.
The lawsuit, one of several class actions filed against major auto financiers in recent years, alleges that Honda discriminated against black car buyers by charging them higher interest rates when they financed their cars at dealerships through the lending arm. The study by Vanderbilt University business professor Mark A. Cohen found that 43.3 percent of Honda's African American borrowers were charged a markup, compared with 22.2 percent of white borrowers.
Of those charged a markup, blacks paid an average $557, compared with $227 for whites. The study found that the disparities occurred even when borrowers of different races had the same creditworthiness.
Cohen's study of 383,652 AHFC loans between June 1999 and April 2003 said black borrowers paid $24.7 million in markups, nearly a quarter of the total, although they were only 12 percent of the company's customers.
"Honda does not and will not tolerate any conduct by its dealers that discriminates against customers or credit applicants on any basis," the company said in a statement, declining to comment further.
The lawsuits against Honda and other auto lenders reveal an extra cost that may be charged, but is usually not disclosed to consumers, when car loans are made. At the time of sale, a loan application is submitted by a dealer to the appropriate automobile lender, which in turn sets an interest rate based on a borrower's creditworthiness, the amount and length of the loan and the type of car purchased. Lenders then give the dealers the flexibility to raise that rate, what the suit calls a "subjective markup." The dealer has traditionally been able to keep about 75 percent of such markups, the lawsuits said.
Nissan Motor Acceptance Corp. and General Motors Acceptance Corp. have settled lawsuits on the issue, with Nissan agreeing to limit markups to 3 percent and GMAC to 2.5 percent. Ford Motor Credit Corp. has also agreed to cap markups at 2.5 percent, even though a class-action lawsuit against it is still pending. Ford and GMAC are the nation's leading auto lenders; Honda is among the top 10, and more than half of Honda and Acura sales are financed through AHFC.
What differentiates Honda is a policy that increases the markup for the least creditworthy customers, the Cohen study found. Unlike other lenders, Honda increased interest rates by 3.5 percentage points for the least creditworthy customers, while markups for more creditworthy customers were limited to 2 percentage points.
That policy increased the racial disparities because a higher proportion of minorities fall in the lower credit tier of car purchasers, said Stuart T. Rossman, director of litigation for the National Consumer Law Center, one of the groups representing black borrowers.
"What is striking here is that while the nation's top two auto lenders have begun correcting the practice, Honda has refused to respond," said Stephen Brobeck, executive director of the Consumer Federation of America, which released the Cohen report.
Earlier this year, the consumer group released its own study, concluding that markups are widespread among auto lenders, affecting at least one in four buyers who get car loans through dealers. The group estimated that the markups cost a borrower an average of $1,000 over the life of the loan and recommended that buyers shop around at banks and credit unions for better interest rates.
In the 12 states where Cohen could obtain race data from driver's licenses, he found the highest dollar markup in Maryland. There, black borrowers with Honda loans were charged an average of $856, compared with the $343 charged white borrowers.