New York Times
August 3, 2004

California Dealers Win Ally on Car Bill

August 3, 2004
By DANNY HAKIM

If buying a car seems to be a complicated and daunting process, consider a dispute that recently emerged in California over regulation of just one small piece of the puzzle.

Last week, the Schwarzenegger administration sided with California car dealers in opposing a bill that would, among other things, curb a practice that consumer groups say routinely inflates the cost of car loans, especially for minority customers.

The bill is the most ambitious attempt in the nation to limit the practice, known as the dealer markup, in which car dealers bump up the interest rates on the loans they offer consumers on behalf of banks or financing companies, including the automakers' finance arms. The dealers, who keep the markups as profit, charge them on some customers' loans and not others.

All major automakers, as well as some banks, have been sued by minority customers who claim that dealers discriminate against them in the way they selectively apply markups.

Consumer groups have also criticized markups more generally, saying they are often invisible to all but the most knowledgeable car shoppers, and that they make the loans much more expensive than those a customer could get directly from a bank or credit union.

Even the California official who laid out the administration's opposition to the bill, in a letter sent last week to its sponsor, said in an interview that he did not have a clear understanding of how the financing process worked, and that his stance on markups was based on the arguments of lobbyists for the car dealers.

In his letter, Bill Cather, the assistant director for legislation at the Department of Motor Vehicles, said that regulation of markups would unfairly single out dealers. But when he was asked to explain his statements, he said, "You've chosen the one part of my letter where I'm most vulnerable, because the department doesn't have oversight of financing."

He added that financing "is not my area of expertise."

Mr. Cather said his greatest concern about the bill involved a section unrelated to markups, which would give buyers the right to return a used car to a dealer within three days of purchase for a nearly full refund. Some other states already have such "cooling off" periods for car purchases.

The bill would limit dealer markups to two percentage points on loans up to 60 months, and to one point on longer loans.

"I do not think it's a bad idea for consumers, certainly in those circumstances where the consumer is not as sophisticated as he or she might be," Mr. Cather said in the interview. But he said that groups representing car dealers had offered testimony in legislative hearings that the measure would "have an impact on their bottom line."