Wall Street Journal
Wednesday, September 1, 2004
Family Finance

Bill Gives California Car Buyers
Strong Protection

By Karen Lundegaard

A bill that would give California car buyers the strongest protections in the country from deceptive auto lending practices is on its way to Gov. Arnold Schwarzenegger's desk.

The bill isn't as tough on car dealers as previous versions. Still, consumer advocates say the bill is significant and could be a model for other states. "it sends a signal to advocates in other parts of the country," says Jack Gillis, public-affairs director for the Consumer Federation of America and the author of several consumer guides to car buying. Mr. Gillis notes that he didn't think the legislation would get as far as it did. "It will be a model for others."

The bill would limit the amount dealers can charge consumers for arranging a car loan, and would require dealers to disclose the cost of items--such as rust-proofing or extended service contracts--that are often wrapped into those loans.

The bill also requires dealers to give consumers their credit scores, which now are often shrouded in secrecy. The bill would also set minimum requirements for used vehicles to be sold as certified.

The proposed legislation addresses many hot-button issues that have been plaguing car dealerships and lenders. Many of the biggest auto lenders have faced lawsuits charging them with discriminatory lending and charging excessive markups on loans to minority customers.

In February, General Motors Corp.'s lending arm settled a lawsuit that limits to 2.5 percentage points the extra interest charge that dealers can add to consumer loans of up to five years duration. For longer loans, the GMAC agreement capped dealer markups at two percentage points.

Those fees are on top of whatever interest rate the bank offers the customer. Still some lenders don't limit the fee dealers can charge their customers, and many consumers never know the higher interest rate is being rolled into their loan.

The amount dealers can mark up a loan has been one of the California legislation's most controversial aspects. The original bill allowed for no interest rate markups. Even last week the maximum charges were set at two points for five-year loans and one percentage point for longer loans. But as passed, the bill mirrors the GMAC settlement, allowing for 2.5-percentage markups for loans up to five years, and two points for longer loans.

Also cut from the bill was a provision that allowed used-car buyers to return a vehicle in three days for a refund, minus charges for any miles driven. Dealers argued that they would become rental agencies.

California Assemblywoman Cindy Montanez says she sponsored the bill after people in her district came into her office with car loans at 28% and 29% interest rates.

Gov. Schwarzenegger's office said it has no position on the bill. He has 30 days to sign or veto it.