N.J. Urged To Outlaw Car Loan Markups

NJ.com — Wednesday, February 23, 2005


Consumer watchdogs and minority leaders are urging state officials to crack down on undisclosed arrangements between auto lenders and dealers that increase a buyer's finance costs.

New Jersey Citizen Action and the Consumer Federation of America claim the arrangements cost New Jersey car buyers - especially minorities - "tens of millions of dollars" a year. The two groups have scheduled a press conference today to demand action.

When a buyer seals a financing deal in the showroom, it is a common practice for auto dealers to add "points" to the lowest rate a lender is willing to offer. The lender then pays the dealer the value of the markup - which can be hundreds or even thousands of dollars - as compensation for arranging the loan. The borrower is not told of the markup.

"I am baffled why this is an issue now when the market is so competitive and rates are so low," said Jim Appleton, head of New Jersey Coalition of Auto Retailers.

Dealers have long argued that they should be able to mark up loan rates to earn a profit from the work they do to arrange them. "They also mark up the cars, they mark up parts," Appleton said.

"Just like a furniture store or any other store. Just like the bank, for that matter."

But a study to be released today will show that blacks on average pay $340 more in dealer markups on financing than whites do, according to Citizen Action spokeswoman Maura Caroselli.

"There are discrimination issues here," said Phyllis Salowe-Kaye, executive director of Hackensack-based Citizen Action. "We want Attorney General [Peter] Harvey to investigate it."

Jeff Lamm, a spokesman for the state consumer affairs office, said Harvey would not comment until he sees the study. "We will review it and take any appropriate action," Lamm said.

The consumer groups also will call on state lawmakers to draft legislation to try to curb dealer markups. Officials in California, New York and Illinois have proposed legislation, but none has enacted a law, said Stuart Rossman of the National Consumer Law Center.

Arkansas has a constitutional provision that limits interest charges and has helped keep hefty markups in check, and Louisiana passed a 3 percent cap on markups last year, Rossman said.

Consumer advocates urge buyers to shop around with banks and credit unions, as well as dealerships before taking on debt.

For those with poor credit, it can be difficult to secure a bank loan. But car dealers have relationships with lenders that specialize in high-risk, high-cost loans.

"People of color who are in lower financial brackets need a vehicle to get to work in New Jersey,'' said Lionel Leach, director of the New Jersey Voter Fund. "They may have credit scores that may not be up to par and feel they have to be satisfied with the rates they get. This is a systemic problem."

Appleton said car buyers with low credit scores, regardless of their race, generally get hit with bigger markups because it usually takes more effort to find loans for them.

"I'll let you in on a secret: People with bad credit pay more for loans," he said.

Appleton said discrimination is "morally wrong."

"As a practical business matter, there would be no motivation,'' he said. "Customers are free to drive up and down Route 17 or Route 4 in Bergen County, and if they are not happy with one, they can find their way to the next."

Nick Lombardi, sales manager at Ramsey Nissan, said dealers do not single out blacks and Latinos for higher markups.

Nonetheless, a slew of the major auto lenders - including Bank of America, GMAC and Nissan Motors Acceptance Corp. - have agreed in recent years to put caps on markups, and some have agreed to make restitution to minority car buyers.

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