Hawkins-Moore has worked for the Akron public schools for 25 years. To save money for the truck, she worked nights in the lingerie department at J.C. Penney. Then she saw the ad in the newspaper. Fred Martin Dodge was offering $1,000 rebates. So on the last day of December 2000, Hawkins-Moore drove to the dealership in Hartville, coupon in hand. She picked out a white Durango, then spent the next six hours haggling over the price.
Finally, she signed a contract with a 14.5 percent interest rate, which she assumed was the best she could get with her credit rating. The long negotiations made her late for a New Year's Eve party. "I was ready to leave, but they did not want me to go without taking the truck," she says.
Hawkins-Moore drove home ecstatic. Four days later, however, the dealership called. Bank One had refused her loan, the salesman said. Given that she had declared bankruptcy seven years earlier, the lowest rate he could find was 15.67 percent.
Hawkins-Moore was angry, so the salesman made her a deal. Pay the higher rate for now, he told her. Then, after six months, he would call the bank and renegotiate. "Somebody at the bank owed him a favor," she says. "That's exactly what he told me." Hawkins-Moore grudgingly signed a new deal.
Six months later, she called the salesman. He didn't remember her, much less his promise to call in a chit at the bank. "I was stuck," she says. "I really felt there was nothing I could do."
It wasn't until two years later that she discovered she'd been scammed. Her transmission started to fail. Fred Martin Dodge refused to honor her warranty and fix it, Hawkins-Moore says, so she sued. And that's how she obtained the original Bank One document, from New Year's Eve 2000, approving her for a 13.5 percent loan, a full percentage point lower than the salesman initially offered.
This, however, still wasn't a big enough extra cut for Fred Martin. Four days later, the salesman convinced her to go up another point. Over the life of the loan, the increases added $2,250 to the cost of the truck. All the while, the salesman claimed it was the best rate Hawkins-Moore could get.
"That's fraud," says Rocco Yeargin, her lawyer.
And Bank One was in on it.
Yeargin also discovered paperwork detailing bank payments to the dealership. For every percentage point that the dealer managed to tack onto the interest rate, Bank One promised a higher kickback. As a result, Fred Martin Dodge earned $600 by bumping the rate.
She sued the dealership. And she continued paying $671 a month for her Durango, even as it sat broken in her garage for a year. She finally won a settlement from Fred Martin Dodge last year. The dealer agreed to take back the truck and pay her legal bills.
Dealership owner Adam Huff says the deal was legit. After Bank One refused Hawkins-Moore's loan, his salesman simply went shopping for the lowest interest rate. And he doesn't see anything wrong with the markup. "So we were paid $600," Huff says. "That doesn't seem unreasonable to me."
Hawkins-Moore's story is not unique. For most loans, the interest rate is determined by the buyer's credit history. But when it comes to cars, banks regularly pay dealers to increase the rate -- without revealing the markup to consumers.
For obvious reasons, the practice, called "loan bumping," was illegal in Ohio before February 2002. That's when state legislators quietly passed a law removing all restraints on kickbacks between banks and dealers.
Amy Salerno, a Republican representative from Columbus, used her position as chairwoman of the obscure Civil and Commercial Law Committee to quietly introduce a bill to repeal the old cap on loan bumping. Salerno offered no press releases on the legislation, nor did she hold hearings. The bill passed easily with little notice.
"That law was repealed in the dark of night," says Stuart Rossman of the National Consumer Law Center. "Even consumer-fraud lawyers, who work with these laws every day, had no idea the bill had even been introduced, much less passed."
Since then, loan bumping has become standard procedure at many lots, costing Ohio consumers millions of dollars every year.
"The higher the interest-rate bump, the higher the kickback," says Laura McDowall, an Akron lawyer who specializes in automotive cases.
And the car buyer is none the wiser.
"This source of profit isn't disclosed on any contract that the buyer sees," says Yeargin. "That's why people never find out about it until they buy a lemon. Then they hire a lawyer, and the lawyer finds the markup hidden in the documents."
Dealers politely call these secret deals "reserve payments." But chances are you'll never know you're paying them unless you buy a lemon. And since the new Senate president is a former car dealer, don't expect help from Columbus anytime soon.
The only way into the party at Jackson Lake RV Park was to buy a motor home. If that was the price of admission, Rhonda Barnhart paid handsomely. In April 2001, she and her husband Paul bought a 35-foot Georgie Boy from Ricart RV Land in Columbus for $91,000. It had cherry-wood cabinets, surround-sound speakers, and a slide-out exterior wall that nearly doubled the size of the living room. It also came equipped with hydraulic levelers, needed to stabilize the 22,000-pound beast on uneven ground.
Still, the Barnharts couldn't sleep in the thing. By the time they drove it to the RV party, their motor home had already spent most of its short life in the Ricart repair shop. It had suffered a broken generator, broken levelers, and a pair of shocks that were so loose they almost popped off as Barnhart was driving. The RV remained parked in Ricart's shop for months at a time, and when Barnhart would call to check on its progress, the repair men always gave another excuse -- they were either waiting for a part from Georgie Boy, or a part from Ford wouldn't fit.
As the autumn rain poured down at Jackson Lake, Barnhart's generator broke again. Then one of the levelers refused to go down. The Barnharts tried sleeping in the twin-sized bed, but kept rolling onto the floor. "That night I prayed for gale-force winds that would blow my motor home over and smash it to smithereens," Rhonda says.
In the morning, as the others relaxed under their foldout awnings to enjoy their first cups of coffee, Barnhart tracked down Ben Kirkendall, service manager for Ricart RV. Kirkendall hit the start button on the generator again and again, until the unit finally burned out. Then he drained the RV's hydraulic fluid onto the ground and used a crowbar to jam the three grounded stabilizers back up. "He looked at us and said, 'Whatever you do, don't put your jacks back down,'" says Rhonda. "Then he turned and walked away."
The Barnharts drove the motor home to the Ricart repair shop. When it was finally repaired three months later, they drove it home to Stewart, near Athens. They tried to stabilize the RV on their driveway, but the same stubborn leveler refused to go down. That's when Rhonda went shopping for an attorney. "I just couldn't take it anymore," she says. "We paid a lot of money for this thing, and we could never use it because it was always in the shop."
Rhett Ricart, co-owner of the dealership, says mechanical problems come with the territory of RV ownership. "Imagine taking your family room, putting it on wheels, and driving it down the road," he says. "It's very unfortunate for the Barnharts that they got a vehicle that needs a lot of repairs, but anybody that buys an RV has to expect that it'll need some maintenance."
But like Hawkins-Moore, it would take a lawsuit before Barnhart learned she hadn't just bought a lemon. She was also paying far too much for it.
She hired Ron Burdge, a Dayton attorney regarded as among the best car-fraud lawyers in Ohio. In addition to all the problems with the repair work, Burdge found documents showing that Ricart cheated the Barnharts on their loan.
The records indicated that First Merit originally approved them for a 6 percent rate. But the Ricart saleswoman never disclosed this to the couple. Instead, she gave the Barnharts a 9 percent loan. The bump cost the couple an additional $12,000. And it won Ricart a $5,863 kickback from First Merit. "We negotiated for hours over the sales price," Rhonda says. But she believed Ricart was truly offering the best interest rate available.
Barnhart's case is unique only for its five-figure cost, Burdge says. Whenever clients get financing through a dealer, he almost always finds kickbacks hidden in the paperwork. The secret deals usually amount to about $500 per car, Burdge says. But hikes of $4,000 are not uncommon. "It's gotten to the point where I'm surprised when I find a loan that hasn't been bumped."
Dealers often make higher profits off financing than they do from selling cars because manufacturers use cash-back offers and discounts to keep prices down and sales volume high. And the growing popularity of websites like Autotrader.com has helped consumers comparison-shop before they ever walk onto a sales lot.
No longer able to make money by inflating prices, many dealers have decided to inflate the interest on loans. "Especially at the big dealerships, they may even lose a little money on the sales price just to draw people in," says Rosemary Shahan, founder of Consumers for Auto Reliability and Safety, a California group that monitors fraud. "But they make it back by jacking up the loan."
What's good for dealers is also good for manufacturers. Ford now makes substantially more money selling credit than cars. Ford Motor Credit Company had a net income of $2.9 billion in 2004, while Ford earned $600 million from cars. Jim Padilla, Ford's chief operating officer, says it doesn't make much difference to him. "Ford credit bucks are worth as much as automotive bucks," he told an audience at the Automotive World Congress last month.
Dealers defend loan bumping, saying it's not their responsibility to tell consumers what interest rates they truly qualify for. "In the state of Ohio, customers sign a contract between 30 and 40 times," Rhett Ricart says. "So you can try to assume ignorance, or that you signed so many pieces of paper that you can't remember, but the truth is that everything in the contract is explained line by line."
That's not the whole truth, say fraud lawyers and consumer activists. Dealers rarely disclose that banks are paying them to artificially jack up interest rates. Moreover, salesmen routinely boast of how many banks they use for financing. If they don't say outright they'll deliver the best interest rate available, they do everything they can to imply it.
"People know to negotiate on the price of the car," says attorney McDowall. "But they never think to negotiate on the interest rate of the loan because they think the deal is already done."
Paula Barnhart filed her lawsuit in April 2003. Almost two years later, she's bogged down in depositions and motions to postpone. Meanwhile, she's still paying $879 a month for a broken motor home that remains parked at the service department of Ricart RV. "I feel like I'm in a nightmare and I can't get out, and I don't know when it's going to end," she says.
Jerry Sergent felt worse with every mile he drove. It would be 11 more months before he could return his Ford Explorer, which he leased from Kerry Ford in Cincinnati in 2000. But since he was already over the lease's mileage limit, he owed a $3,000 fine. Now he was paying an additional 15 cents for every mile he drove.
Parking the SUV in his driveway for the next year wasn't an option. When Sergent and his wife Melissa aren't working or sleeping, they spend most of their time driving. Sergent manages a steel factory an hour away. Melissa drives an hour to her job in the opposite direction. "I seriously lose track of how many miles I drive every week," Jerry says.
The Explorer was costing Sergent hundreds of dollars a month in mileage charges. It was also unreliable. It regularly refused to start, and the transmission had started to slip and grind. Sergent didn't have the money to fix either problem.
By the time he and his wife arrived at Kerry Ford in July 2003, the Explorer felt like an anvil tied around his neck. Sergent told the salesman that he had his eye on the new F150 pickups. Then he handed over his driver's license and agreed to let the man run his credit report. "That was my first mistake," he says.
Sergent and his wife walked the lot for a few minutes and settled on a green pickup with four doors and enough room for two car seats. Back inside, they started haggling.
The salesman said he would pick up Sergent's $3,000 mileage charge, plus give him $4,800 for the leased Explorer. The savings would allow Sergent to add accessories. "It sounded like a great deal," Sergent says. "My wife was pregnant at the time, so I wanted steps up the side to help her get up."
In less than an hour, the deal was sealed. But Sergent didn't closely read the lease agreement, and the salesman never mentioned the $4,300 fee for trading in the Explorer early. He also believed the 14.95 percent interest rate was the best he could get, since he'd previously filed for bankruptcy. "I know it sounds stupid, but I trusted him," he says.
Two weeks later, Sergent received a threatening letter from Huntington Bank, demanding $12,600 to cover the rest of the lease, the mileage fee, and the early trade-in fee. Sergent ignored it, thinking the bank had made a mistake. Then came another letter, this one more insistent. Sergent called the dealership. "[The salesman] said, 'Jerry, that's just a scare tactic. Don't worry about it,'" Sergent says. "Next thing I know, the bank is hitting me with a summons to appear in court."
Sergent hired Ron Burdge, who quickly discovered that Sergent had indeed broken his lease agreement, and that he now owed the bank $12,600. "The dealership were the ones that gave me the lease in the first place," Sergent says. "Why did they tell me I could trade it in if they knew I couldn't?"
Burdge also discovered that the dealership had artificially bumped the loan. Capital One actually approved Sergent for an 11.45 percent loan. But the dealership jacked it up to 14.95 percent without telling Sergent. The secret deal added $4,199 to the cost of the truck.
Kerry Ford says the blame rests with Sergent. "The customer always has a contract," says General Manager Jim Bloebaum. "It's full disclosure. They always see the interest rate before they sign."
But through Sergent's lawsuit against Kerry and Huntington, Burdge found that Capital One was secretly paying Kerry to jack up interest rates. "There's no question the lenders know these dealers are doing this," says Burdge, who has handled fraud cases for 27 years. "Because the lenders tell the dealers beforehand how much they'll pay for the dealers to jack up the rates."
In the end, Sergent had to drop his suit. Regardless of what he'd been told, he still owed Huntington from the previous lease. Instead, he filed a second complaint solely against Kerry, which Burdge hopes to turn into a class-action suit on behalf of overcharged customers.
Before this fiasco, Sergent had managed to build up a small savings. Today he's on the verge of bankruptcy. "Every day I get calls from my creditors at my job," Sergent says. "I just have to hang up on them."
KaraLea Asher knows her way around a car dealership -- her father, Dale Carter, owns Carter Chrysler in Eaton, west of Dayton near the Indiana border. When she needed a bigger car to drive her 14-year-old son and his friends to football practice, she returned to Performance Honda in Fairfield, where she had bought her 1998 Accord.
Asher arrived on a warm evening in September 2003, still wearing her scrubs from her job as a scheduling clerk at Miami Valley Hospital in Dayton. In minutes she had chosen a black Element, Honda's small SUV. "I pulled in, I saw it, I wanted it, and I bought it," she says.
But as she drove home, Asher heard a loud pinging noise coming from the left front wheel. The next day, she realized the car was actually painted three different shades of black. In the morning sunlight, she could also see thousands of tiny scratches that weren't visible under the pale lights of the car lot.
Asher took the car back to the dealership to fix the pinging noise and touch up the paint. When she drove it home, the noise was louder. She returned 10 more times, and each time the service department said the wheel bearings simply needed more grease.
Last summer, the wheel casing finally broke. She lost control and rammed a concrete wall.
Only after Asher sued did she discover that Performance Honda had bumped her loan. American Honda Financial Corporation had approved her for a 5.74 percent interest rate, but Performance Honda secretly jacked it up to 9.15 percent, adding $2,377.20 to the cost of the car.
The dealership refuses to discuss lending practices. "I'm not sure if I should discuss anything with you because of the Patriot Act and all," Business Manager Mark Williams oddly explains.
But Asher's father has no problem discussing the deal. "They lied to her," says Dale Carter, who's been selling cars for 43 years. "These big dealers, they just turn the contract so fast so you can't even look at it. They don't want to let you see that interest rate."
According to the National Consumer Law Center, Asher wasn't the first person Performance Honda overcharged on a loan. The center sued Honda dealers nationwide for discriminating against black car buyers. Lawyers surveyed the records of almost 400,000 American Honda Financial Corp. customers from 1999 to 2003. Their study found that blacks paid an average loan markup of $1,108, compared to an average markup of $698 for whites. All together, Honda dealers charged $101.8 million in extra loan fees over four years.
The lawyers who filed the suit would have preferred to go after Honda for overcharging customers regardless of race. But discrimination is barred under federal law. Unfortunately, misleading lending is perfectly legal. "We took the racial angle because we had to, not because we wanted to," says the center's Stuart Rossman.
That's because federal laws are no better than Ohio's. Secretly cranking up interest rates is illegal in many kinds of loans, including mortgages. But in 1977, the Federal Reserve ruled that car dealers are not required to tell consumers what rate they actually qualify for. Doing so "would result in . . . possible confusion or misunderstanding," the Fed decided. The Fed never explained why honesty might be more confusing than deceit.
So, in an odd twist of fate, minorities can find protection under civil rights law, but banks and car dealers are free to overcharge whites as much as they want.
The Consumer Law Center settled a racial discrimination suit against Nissan Motors Acceptance Corp. in 2003 that forced the company to spend $1 million to help minority car buyers avoid getting ripped off. The company also agreed to give 675,000 no-markup loans to African Americans and Hispanics.
A similar settlement with General Motors Acceptance Corporation in 2004 forced the company to cap markups at 2 percent on long-term loans. In a testament to the money being made off the secret deals, the company estimates that the settlement will cost it $80 million over five years. Discrimination cases against the financing arms of Honda, Ford, Toyota, and Chrysler are ongoing.
"Dealers should be able to make a profit for offering the service of setting up loans," Rossman says. "But is that service worth $1,000? Is it worth $5,000? I don't think so."
KaraLea Asher had to empty her savings account and hawk her son's four-wheeler to cover her legal bills. Performance Honda eventually settled. It agreed to pay her legal bills and, last week, retrieved the wrecked Element from Asher's house.
But since laws so heavily favor dealers and lenders, most consumers aren't so lucky. Karen Burns bought a used Ford Mustang from Beechmont Chevrolet in Cincinnati in August 2001. The salesman promised her a 6.2 percent loan. But before Burns signed the contract, he jacked the interest rate up to 15.29 percent.
He concealed the change by covering the top half of the contract with a piece of paper, Burns says. The sleight of hand cost her an additional $5,400. Burns sued. In legal statements, the dealer never denied increasing the rate.
Still, she lost at trial. So she appealed. Judge Mark Painter of the First District Court of Appeals was convinced she'd been screwed. He wrote that dealers cannot promise one rate, then slip a different rate into the contract, "and then rely on the 'well the dummy signed anyway' defense."
But the other two judges ruled that Ohio law makes such deception perfectly legal. Burns lost her three-year battle in September. In the meantime, she fell behind on her property taxes and was forced to sell her home. She still owes her lawyer thousands of dollars.
Senate President Bill Harris, a retired car dealer from Ashland, was a member of the Ohio House when the state's law restricting loan bumping was overturned. He says the change was intended to create more competition and drive down loan costs, "not to give dealers the opportunity to add points to the financing."
Still, Harris has yet to hear any complaints. "If problems are being documented, I think the attorney general would be coming back to the legislature to change the law," he says. "And I would think the legislature would be receptive."
The attorney general's office thinks the practice of loan bumping is "unfair and deceptive," says Mike Gonidakis, Ohio's senior deputy for consumer protection. But don't expect any action soon. "We're not saying it doesn't happen in Ohio, but we're not seeing a pattern of complaints. Most consumers just aren't aware of it."
The state doesn't have a history of siding with consumers anyway, as witnessed by its fight to bar individual cities from enacting predatory-lending laws. So consumers are left to fend for themselves.
"The reality is, anytime the dealer sets up the loan, the consumer pays more than they have to," says Burdge. "The bank pockets the difference, the bank is smiling, and the consumer drives down the road never the wiser."