US dealers are in some cases increasing auto finance rates over wholesale rates in a discriminatory fashion, according to the consumer lobby group, which also says dealers remit part of the profits on rate spreads to their lenders. But NADA has responded that dealer's retail rates are fair compensation for risk, and that their finance margins are no less transparent than the undisclosed mark-ups of a McDonald's.
The Consumer Federation has argued for a flat charge for the provision of finance facilities, of $100- $200 and against the traditional rate spread, saying the ignorance of base rates affects vulnerable consumers in particular.
Dealers are said to typically increase the rate to buyers by around 3%, which can add $1,000 to the cost of a car loan, according to the Consumer Federation. The group estimates the practice affects 25% of dealer finance business and disproportionately hurts low- to middle-income blacks and Hispanics. The Federation's claim has been supported by a civil rights organisation called the Rainbow/PUSH Coalition and by a Hispanic advocacy group.
The standard practice of earning margin on finance through rate mark-ups has come under pressure from other quarters in the US market. California passed a law requiring dealers to retain certain documents to enable regulators to track lending practices, while Nissan North America has begun offering 'no mark up' loans this year in settlement of a legal dispute with 10 black and Hispanic car buyers dating back to 1998.
GMAC is involved in a similar, current legal dispute, but says its credit rating systems are strictly race-neutral, and its rates fully disclosed and denies one of the Consumer Federation's charges, that lenders such as GMAC get a cut of dealers' rate spread profits.