Some car dealers are hiking up rates and splitting profits with money lenders.

WASHINGTON (AP) – Secretive auto financing charges cost consumers $1 billion each year, and blacks and Hispanics are particular targets, a consumer advocacy group said Monday.

When a car buyer arranges financing through an auto dealer, lenders quote a finance rate based on the buyer’s credit history. In some cases, dealers are increasing that rate by several percentage points and sharing the profit with lenders, the Consumer Federation of America said.

The National Automobile Dealers Association responded that the charges are fair compensation for dealers who set up financing.

“The rate provided by finance companies to dealers is a wholesale rate,” the association said in a statement. “It’s the same as the difference between what McDonald’s pays for a hamburger and what we pay for it. The McDonald’s markup is undisclosed.”

Stephen Brobeck, executive director of the Consumer Federation, said it’s reasonable for dealers to charge a fee for setting up financing, but he said they should charge a flat rate of $100 or $200 instead of marking up financing rates.

Now, he said, consumers avoid the charges only if they’re savvy enough to know the lender’s rate.

“There’s sort of an art here on the part of the dealer, to know which consumers will accept this loan rate,” Brobeck said. “They’re taking advantage of vulnerable consumers.”

Dealers typically increase the rate by around 3 percentage points, which can add $1,000 to the cost of the loan, the Consumer Federation said. The group estimates the practice impacts one out of every four buyers who finance their vehicles through dealerships and disproportionately hurts low- to middle-income blacks and Hispanics.

“The practice of the markup is unethical, immoral and should be deemed illegal,” said Fenimore Fisher of the Rainbow/PUSH Coalition, a civil rights organization.

The Hispanic advocacy group, National Council of La Raza, also joined the Consumer Federation on Monday.

Brobeck said consumers can avoid markups if they call their bank and get a rate quote before they reach any terms with an auto dealer. The National Automobile Dealers Association also said consumers are free to shop around if a quote seems too high.

The Consumer Federation said the practice has gained attention in the last few years because of a handful of court cases and legislation.

In July, former California Gov. Gray Davis Davis signed a law requiring dealers to retain documents so regulators can better track lending practices.

Nissan began offering “no markup” car loans this year to qualified minorities as part of a settlement with 10 black and Hispanic car buyers, who sued the company’s finance division over markups in 1998. General Motors Acceptance Corp., the nation’s second-largest auto lender, also is involved in a court case with a black customer from Tennessee who says she was overcharged.

GMAC spokeswoman Anne Marie Sylvester said the company’s credit evaluations are “strictly race neutral.” She also denied the Consumer Federation’s claim that lenders get a cut of the markup that dealers charge.

“The full costs of each transaction are disclosed to the consumer,” she said.

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On the Net:

Consumer Federation of American, http://www.consumerfed.org

National Automobile Dealers Association, http://www.nada.org

AP-ES-01-26-04 1721EST