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Buying a car with add-on products and services seldom a good deal for consumers

It's that time of year again when auto dealers try to make room in their showrooms and lots for next year’s models. The seasonal clearance sales that come right before the holidays are just as tempting as ever, beckoning consumers to get that proverbial ‘new car fever’.

But don’t let those shiny new cars blind you from the facts of a major consumer purchase. After mortgages and student loans, auto sales take a big bite out of your pocket and available credit.

A new analysis of car sales data reveals that many consumers are being charged triple-digit mark-ups on purchases that include a lot of questionable add-on products that cost consumers a bundle and reap major profits for dealers.

A new policy analysis by the National Consumer Law Center (NCLC), examined sales and financing practices widely used by car dealers. Aggressive sales of add-on products were frequently offered at inflated prices. Additionally, these same products and services are usually available for consumers to purchase more cheaply on their own. When these items are added to the financing of the vehicle, consumers end up padding the costs of finance, making the debt more costly than necessary.

After analyzing data on the sale of three million add-on products sold on 1.8 million vehicles from September 2009 through June 2015, these add-on costs were both unreasonably high and varied at the discretion of the dealership as to the price levels that would be charged.

Our analysis demonstrates the negative consequences of opaque and inconsistent pricing of auto add-on products and the urgent need to bring transparency and consistency to this market,” said John W. Van Alst, the report’s primary author and director of NCLC’s Working Cars for Working Families Project.

Here’s how the unfair pricing and add-ons occur:

After a consumer settles on a price of a vehicle, he or she is then told to see the finance and insurance (F&I) representative to review terms and sign the purchase. What few consumers know, is that many dealers pay its F&I personnel on a commission basis. Hence, the more costs added to the vehicle purchase, the more these employees earn. Other dealers, according to NCLC, pay a higher percentage commission as the F&I profits increase per vehicle sold. Sometimes car sales representatives receive a commission on the cars sold and additionally, a portion of the add-ons, sometimes known as “back-end” products.

If consumers accept all the options offered by F&I, the likelihood is that they will eventually pay far more than the vehicle is actually worth. Not only that, the amount of mark-up that boosts the dealership’s profits would be far cheaper and affordable if the consumer secured them independently. To make these products and services appear affordable, the length of the auto loan is often extended to 72 or 84 months -- or even longer. The longer the auto loan, the more likely that the consumer is getting a bad deal.

NCLC also cites previous research by the Center for Responsible Lending (CRL) that determined car buyers who financed vehicles at the dealership in 2009 paid $25.8 billion in interest rate mark-ups. That same study also found that more than half of Black car purchasers – 54 percent - were also charged loan kickbacks, compared to only 31 percent of whites.

In 2014, a CRL consumer survey also found that Black and Latino car buyers purchased more add-on products than other consumers after being told that the additional items were required to finalize the deal. As a result, although consumers of color reported trying more than other consumers to negotiate a fair car deal, they still wound up paying more for their purchases than similarly-situated white consumers.

Here are two of the most- costly add-on costs that NCLC found to be the most expensive for consumers:

Window etching is marketed by dealers as a deterrent to theft or making it easier to identify and recover a stolen vehicle. Usually, a Vehicle Identification Number (VIN) already appears in multiple places on the vehicle coming out of manufacturing.

Similarly, Guaranteed Asset Protection (GAP) is almost a certain sign of having paid too much for the vehicle. Should a vehicle be stolen or wrecked, the consumer’s collision or comprehensive insurance coverage is usually limited to the market value of the car and not the amount still owed. Consumers, however, are still held liable for the vehicle’s negative equity. GAP products are sold to hold the consumer harmless between the differing amounts. Unfortunately, few consumers ever receive what was promised with these products. Some do not cover the deductible on the consumer’s collision or theft coverage.

Taken together, the combined average markup on GAP and etch products was 170 percent. By comparison and according to the National Automobile Dealers Association, new car sales in 2015 had an average markup of 3.4 percent.

For many Americans, affordable car ownership is not a luxury, but a necessity,” noted Delvin Davis, a senior researcher with CRL. “People need reliable transportation for employment, personal business, health care and more. Making car more expensive with marked-up add-ons deepens the debt incurred while increasing the likelihood that they really paid too much.”


Black Student Loan Borrowers Fail to Get a Fair Deal on Federal Loans

For most families, the pursuit of higher education means substantial investments in time, effort, and a combination of cash and loans to gain a college degree. These investments – both human and material -- are made in confidence that the rewards, although often years away, will one day result in a marketable set of skills that can command a better standard of living over a lifetime.

Unfortunately, life does not always bring what was once hoped for. Decades of racial wealth disparities result in the majority of Black students borrowing more loans than their white classmates. Even after 12 years, student loan balances for Black bachelor’s graduates grew to 114 percent of the principal borrowed. By comparison, white bachelor grads who borrowed loans owed only 47 percent of their principal for the same time frame.

This new finding comes from an education analysis by the Center for American Progress (CAP). Using U.S. Department of Education data, CAP examined long-term outcomes of student borrowers by race and ethnicity among students who began college in the 2003-04 school year. After a dozen years, CAP found that the former Black students owed more on their federal student loans, and further that nearly half of Black college student borrowers also defaulted on their loans. As some might suspect, 75 percent of those who dropped out of for-profit colleges wound up in default.

Seeing even African-American students who earned a bachelor’s degree struggle also reinforces that we cannot pretend the federal student loan program exists in a vacuum,” wrote Ben Miller, author of the analysis and senior director for Postsecondary Education at the Center for American Progress.

Racial discrimination in hiring has not improved over the past quarter century,” Miller continued. “Perhaps it’s too much to expect student loans and postsecondary education to solve these structural problems, but sending African-American students into an inequitable adulthood with large debts from college can put them even further behind than they already start.”

The ‘further behind’ reference speaks to the $1,700 in accumulated wealth held by median Black households. Household wealth is typically determined by subtracting all expenses and debts from cash sources and reserves like savings accounts and/or investments.

A second important review of the nation’s student loan crisis adds more reason for concern. The annual Student Loan Ombudsman Report released by the Consumer Financial Protection Bureau (CFPB) found that over the past year, 56 percent of student loan complaints received by CFPB were about federal loans. Among federal loan complaints, 71 percent were about either a lender or servicer. Many borrowers continue to struggle to access the protections guaranteed under federal law. These laws were designed to help borrowers avoid delinquency and default during periods of economic disruption like long-term unemployment.

By comparison, private student loans, nearly always higher-priced and with more rigid repayment terms accounted for approximately 37 percent of 2016’s student loan complaints, with related debt collection complaints comprising the remainder.

As borrowers continue to fall through the cracks of our broken student loan system, the Bureau’s work to date offers a roadmap for consumer-driven reforms,” said CFPB Student Loan Ombudsman Seth Frotman. “When borrowers are empowered to stand up for themselves, they can shape policy and spur government to take action. We have much more work to do to build a student loan market that works better for consumers.”

If lenders and servicers had done a better job with student loans, CFPB would not have needed to return more than $750 million to mistreated borrowers. One can only wonder how many defaults could have been avoided if servicers had been more accurate and efficient.

Just as there were mortgage borrowers who unnecessarily went into foreclosure during the housing crisis, there are now borrowers who are unnecessarily defaulting on student loans when alternatives exist to protect their payment affordability and their credit ratings,” noted Whitney Barkley-Denney, a senior policy counsel with the Center for Responsible Lending (CRL) and a specialist in student loans. “These unnecessary defaults, in many cases, contribute to the 2,300 debt collection complaints involving student loans.

Something is wrong when in a single year, there are more complaints about taxpayer-funded loans than there are about private ones. This finding reveals how the ill-advised recent revocation of an information sharing agreement by the Department of Education with the CFPB is really hurting borrowers. As this report suggests, there should be more oversight of Department loans and servicing, not less. This includes oversight from independent agencies like the CFPB and state regulators.”

Readers may recall an earlier column that shared how under Secretary Betsy DeVos, the agency severed its information-sharing agreements with the CFPB. It would seem to be common sense for two federal offices to work cooperatively and collaboratively to resolve student loan issues. Perhaps the Education Department will reconsider its decision and make a good-faith effort to better serve student borrowers.

It’s hard to build wealth when debts don’t go down or away. But it is tragic when those who did everything to build a better life cannot get a fair deal on a taxpayer-funded education program.


Equifax data breach leaves at least 143 million consumers credit at risk

(September 14, 2017) – Record-breaking back-to-back hurricanes in Houston and Florida brought unprecedented winds and rains affecting millions of Americans. Yet another storm just as brutal but financial in nature is also raging and affects at least 143 million Americans, as well as consumers in Canada and the United Kingdom: the Equifax data breach that took place from mid-May to July of this year.

On July 29, Equifax, one of the three major credit reporting corporations, discovered that unauthorized data access had occurred. Yet it was not until September 7 when the multi-national data breach was announced publicly. This massive cybersecurity breach includes federal income tax records, as well as employee records for government employees and those of Fortune 500 firms. Even recipients of major government programs like Medicare, Medicaid, and Social Security are affected.

For consumers, the personal information exposed to fraud and identity theft could mean a lifetime of closely monitoring and defending personal data to fight theft, fines and more. For businesses, questions will emerge as to whether millions of credit accounts were fraudulently opened and additionally whether they will be held partially responsible for its perpetuation.

In reaction to this cybercrime, a surge of federal class action lawsuits are going after Equifax. As many as 50 have been filed in at least 14 states and the District of Columbia as of September 12. The Federal Bureau of Investigation is reportedly examining what went wrong from a criminal perspective. On the civil side of the law, the Consumer Financial Protection Bureau (CFPB) is beginning its own independent investigation.

Now a growing number of bipartisan inquiries from Capitol Hill are demanding to know why these breaches of personally identifiable information (PII) came about, what actions Equifax took, and what the global firm intends to do on behalf of consumers whose names, birth dates, addresses, Social Security numbers and drivers’ licenses are all in jeopardy. Equifax also knew that an estimated 209,000 credit card holders and some 182,000 consumers in the U.S. who have a dispute on file with a creditor also had comprised PII.

This hack into sensitive information compiled and maintained by Equifax is one of the largest data breaches in our nation’s history and someone has to be held accountable,” said Congresswoman Maxine Waters, the Ranking Member of the House Financial Services Committee in an article for Business Insider.

Given the important role credit scores play in the lives and financial futures of hardworking Americans, Congress must diligently examine the way our credit reporting agencies are operating and impose additional statutory and regulatory reforms to protect the integrity of the country’s credit reporting system,” Waters continued.

In a September 11 letter to Richard F. Smith, Equifax’s Chairman and Chief Executive Office, the Chair and Ranking Member of the Senate Finance Committee went further to pose a series of questions to be answered by September 26. Issues raised in the letter include binding arbitration clauses that deny affected consumers the right of class action lawsuits, the firm’s security systems and controls, how consumers can expect to be officially notified, and what, if any, protections Equifax will offer to affected consumers.

The scope and scale of this breach appears to make it one of the largest on record, and the sensitivity of the information compromised may make it the most costly to taxpayers and consumers,” wrote Senators Orrin Hatch, Senate Finance Chair and Ron Wyden, the committee’s Ranking Member.

The following day, September 12, another letter to Equifax included questions on what data changes to Equifax’s security plans and procedures were made as this breach now becomes its third one in only two years. Signed by 24 Members of Congress who serve on the House Energy and Commerce Committee, they represent 15 states. Three are also members of the Congressional Black Caucus: Representatives G.K. Butterfield of North Carolina, Brooklyn’s Yvette Clarke and Bobby L. Rush of Chicago.

Your company profits from collecting highly sensitive personal information from American consumers – it should take seriously its responsibility to keep data safe and to inform consumers when its protections fail”, wrote the Representatives.

The massive Equifax data breach is one of the largest in our country’s history, affecting half of the United States population and nearly three-quarters of consumers with credit reports,” said Chi Chi Wu with the National Consumer Law Center. “A security freeze is the most effective measure against “new account” identity theft, because it stops thieves from using the consumer’s stolen information.”

To follow Wu’s advice, consumers will need to contact all three of the major credit reporting bureaus and request that no new accounts be opened in their names. Once requested, consumers will not be able to easily apply for new credit accounts or apply for a loan. An additional layer of precaution would be to restore consumers’ day in court,” noted Melissa Stegman, a senior policy counsel with the Center for Responsible Lending (CRL). “When a company has injured consumers, it should not also decide whether those affected have a right to pursue justice. Although Equifax claimed it will not assert arbitration in the aftermath of its data breach, consumers must be able to challenge corporate wrongdoing in the courts and Congress should cease its efforts to quash the rule.”

Congresswoman Waters prefers a legislative approach – one that will ensure this type of financial disaster from happening again.

I have long advocated for an overhaul of our nation’s credit reporting system,” said Waters, “and I will reintroduce legislation that will enhance consumer protection tools available to minimize harm caused by identity theft.”

Equifax proves why we must protect your right to join class actions,” – said Senator Elizabeth Warren.

At this juncture, CFPB and at least 143 million American consumers would agree.

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