Calif. group preps ballot proposal to ban dealer markup on interest rates

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A consumer advocacy group in California has taken initial steps to place a proposal on the state's November 2014 ballot that would prohibit dealerships from adding to interest rates on consumer auto loans.

The group, Consumers for Auto Reliability and Safety, based in Sacramento, characterizes the dealership add-ons -- also known as the dealer reserve -- as "hidden extra charges."

Rosemary Shahan, president of the group, told Automotive News that like the Consumer Financial Protection Bureau, her group is OK with dealerships being compensated for arranging loans, but not if the dealership can add to the consumer's interest rate.

The markup is "related to increasing the interest rate, and that's what we want to get away from," Shahan said in a phone interview on Tuesday, Jan. 7.

The Consumer Financial Protection Bureau has said consistently that dealerships deserve to be compensated for negotiating auto loans but that they shouldn't have discretion in setting that compensation because minority borrowers can end up paying higher amounts of interest. The bureau suggests lenders replace the dealer reserve with flat fees or some other form of dealer compensation.

The Consumers for Auto Reliability and Safety proposal calls for the state to "prohibit dealer markups."

Other provisions would prevent dealers from hiring people with prior convictions for identity theft, forgery or fraud "for positions where they would have access to car buyers' personal financial information."

The proposal also would prohibit what it calls "bait and switch financing, also known as yo-yo financing," in which a customer takes possession of a vehicle before the loan is approved then ends up agreeing to a higher interest rate when the loan falls through.

Brian Maas, president of California New Car Dealers Association, told Automotive News the proposal from Consumers for Auto Reliability and Safety is "a solution in search of a problem."

"No one, including the CFPB, has demonstrated any evidence that the things [Shahan] purports to fix, need fixing," Maas said. At $200, he said, it's easy and inexpensive to register a proposed ballot initiative in California. Actually getting it on the ballot, he added, is a lot harder and more expensive.

California is the nation's largest market for new-car sales with 2012 new-vehicle registrations of 1.5 million.

The California dealer association estimates that getting the Consumers for Auto Reliability and Safety proposal on the November ballot would require more than 500,000 valid signatures. Based on prior experience with ballot initiatives, that effort could cost $1 million to $3 million, Maas said.

Shahan said that getting 500,000 valid signatures probably requires gathering more than 800,000 signatures to allow for those that can't be validated. She estimated the cost at around $1.5 million.

Consumers for Auto Reliability and Safety has four versions of the proposal and hasn't decided yet which version it should canvass around the state, Shahan said.

The "prohibit dealer markups" proposal is included in only two of the four versions, she said.

The group has to move soon because it has only until April 18 to collect enough signatures, she said.

Maas said even if the proposal's a long shot, it's no joke.

"From our perspective, they have filed an official measure, and it has been cleared for signature gathering," he said. "We're taking it seriously."

You can reach Jim Henry at autonews@crain.com.

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