Published in · 4 min read · Jun 10, 2020
Startups can change the world. Small companies can attack and defeat big problems. I want to introduce you to a company called MotoRefi, which is committed to righting a wrong that has troubled me for years. Car dealers routinely put buyers into higher-priced loans than they deserve and pocket the difference. It is a big, painful problem that has been part of the dealer landscape for decades. There has been legal action to attempt to curtail the practice it, but so far, it hasn’t made enough of a difference. MotoRefi is changing this scenario.
The Problem
Auto dealers commonly mark up or increase the interest rate offered to vehicle purchasers. Most consumers aren’t aware they’re paying too much by financing a car through their dealer. It seems convenient and easy to go from the sales office to the finance office at the dealer. With one transaction, the consumer can drive off the lot in their new vehicle fully financed. The problem is that many times the dealer does not offer the best financing possible for many consumers. The Center for Responsible Lending states that “79% of consumers are unaware that auto dealers can markup rates without their consent.”
When a customer is ready to finance a car at a dealer, the lender communicates a “buy rate” to the dealer. The buy rate reflects the borrower’s creditworthiness and the rate at which the lender will issue the loan to the customer. The lender allows auto dealers to charge a higher interest rate when they finalize the deal with the consumer. This is called “dealer markup.” Markups generate compensation for dealers while giving them the discretion to charge consumers different rates regardless of consumer creditworthiness. Lenders may permit dealers to markup consumers’ interest rates as much as 2.25 percent for contracts with terms of 5 years or less, and 2 percent for deals with longer terms.
Financing makes bank for the dealer. The average consumer has their interest rate marked up by 2.47%, according to CRL, which ends up delivering around $1700 more over the life of a $25k loan. For the dealer, the $1.7k profit on the financing is three times what they typically make from selling the car itself.
What’s worse is that borrowers with poor credit receive an even higher rate mark up. Litigation has demonstrated that there is a racial discrimination component to this activity as well.
Legal theft
I think this practice should be illegal. It’s not. In speaking to State legislators in both Virginia and North Carolina, I’ve pressed them to take action. They acknowledge that auto dealer financing is a consumer and racial justice issue. The CRL confirms it costs consumers over $25.8 Billion over the loans. In honest moments, elected officials will acknowledge the power and money of the auto dealer lobby. It is formidable. The OpenSecrets.org website lists auto dealer political contributions to Congress. As you’ll see in the link below, 75% of Congress members receive average donations of $6.7k from the industry.
This isn’t to say there aren’t laws against some of these practices. Some regulations address dealer markup when it crosses distinct discrimination boundaries. But creditworthiness can always be used as a reason for markup, so racial discrimination is challenging to show.
Lawsuits
Over the years, there have been a series of informative class-action lawsuits against the captive auto finance (GMAC, Honda Financial, etc.) units for major car manufacturers. Most of these have cited the Equal Credit Opportunity Act, which prohibits discrimination against credit applicants based on race, color, religion, national origin, sex, marital status, age, etc.
One of the notable cases, Coleman vs. GMAC,(Link) from 2004, contended that African Americans and Hispanics who purchased automobiles through GMAC paid higher prices for credit because they received higher markups. The plaintiffs claimed that as a result of markup pricing, GMAC discriminated against African Americans and Hispanics.
The settlement agreement is instructive of how institutionalized this problem has become in America. GMAC agreed to do the following:
a. Limit the amount of markup on individual automobile loans for the next three years [a cap of 2.50% on loans for terms of sixty (60) months or less; and 2.00% on loans for terms of more than sixty (60) months;
b. Disclose to consumers that loan rates are negotiable and can be negotiated with the dealer;
c. Fund consumer education and assistance programs directed to African Americans and Hispanic communities which will help consumers concerning credit financing; and
d. Offer 1,250,000 pre-approved; no mark up offers of credit to African Americans and Hispanics over the next five years.
They agreed to limit the markup, as stated above. Not stop it.
In 2015, The Consumer Financial Protection Bureau and the US Department of Justice announced a settlement with American Honda Finance Corporation to settle claims that thousands of African-American, Hispanic, and Asian and Pacific Islanders who bought Honda vehicles paid higher interest rates than white car buyers. Honda paid $24 million to affected buyers. They capped the markup rate to 1.25%.
The result is this practice will continue to rob consumers. That is until they re-finance their car loan to the rate they deserve from an independent lender.
MotoRefi’s business is transitioning consumers into the auto loan each customer deserves based upon their credit, NOT the profit available. MotoRefi delivers re-financing offers without credit rating impact and completes new loans quickly. Consumers receive no obligation loan offers without having to provide their Social Security number or making any commitment.
In full disclosure, I believe in MotoRefi’s business so much that I personally invested in their company. I do hope my investment in MotoRefi is a wise one. Given their goal and the problem they are attacking, I know it will be a worthy one.
