California Dealers Win Ally on Car Bill
(cont'd)

Car dealers, who were important contributors to Gov. Arnold Schwarzenegger's election campaign, have said that loan markups are legitimate fees that they earn for arranging loans, and that they need the flexibility to make profits where they can.

"The car business is a high-risk business," said Peter Welch, president of the California Motor Car Dealers Association. "The dealer has an amount they have to average per car to stay in business. Say it's $800 per car. It doesn't matter where they make it, whether on the service contract or the finance spread or the floor mats. But unless they can make it, it's not worth being in business anymore."

Last month, consumer groups publicized a study showing that dealers arranging loans using Honda's financing subsidiary were twice as likely to charge markups to black buyers than white buyers, and that the average additional cost to the black buyers with marked-up loans was $1,108, compared with $698 for whites.

The report is being submitted as evidence in lawsuits pending against Honda in federal court in Tennessee and in California state court. Nissan and General Motors have settled similar suits and agreed to restrict their dealers' markups, with G.M.'s lending arm agreeing to a cap of 2.5 percentage points on loans up to 60 months.
"The markups are arbitrary and discriminatory," said State Assemblywoman Cindy Montanez, a Democrat from the San Fernando Valley who sponsored the California bill. "It's not transparent, and lenders are abusing it and taking advantage of consumers."

Mr. Cather, in his letter to Assemblywoman Montanez, wrote that "a one-size-fits-all prohibition does not recognize the realities of the marketplace, nor the special circumstances involved in obtaining credit for those with poor or no prior credit histories."

Critics of the markups said the borrower's creditworthiness is already fully reflected in the financing institution's original interest rate on the loan. Mr. Cather's objection "is a ridiculous argument," said Stuart Rossman, a lawyer at the National Consumer Law Center, which represents some plaintiffs in the suits against the carmakers. "All of the risk is assumed by the finance company."

Mr. Welch of the California Motor Car Dealers Association said that even so, arranging loans for people with poor credit is more time-consuming and expensive because their finances often are in disarray.

"With many of those people, it takes hours to get credit information," he said. If their markups are capped, he said, "dealers won't take the time because the risk won't be worth the reward."

Mr. Cather also argued that the California bill is unfair because it would not impose any limits on banks, finance companies or credit unions that make car loans directly to consumers.

But there is no intermediary involved in the loans to mark them up the way car dealers do; the banks and finance companies make their profits on the loans themselves.

"It should be a big surprise to anybody that a Department of Motor Vehicles that is supposed to protect consumers writes a letter of opposition to what is one of the strongest consumer protection measures in the Legislature," Assemblywoman Montanez said.

Bill Branch, a spokesman for the department, said, "The claim that D.M.V. cares more about auto dealers than the car-buying public is patently false. It just isn't true."