Louisiana is the first state to limit the amount dealers can raise interest rates on vehicle loans above the wholesale rates they get from lenders.
The rules go into effect this month.
A law passed by Louisiana's legislature in June caps interest rate markups at 3 percentage points. It also requires dealers to tell customers that dealerships may profit from retail rates on vehicle loans.
Louisiana dealers initiated the legislation after recent media reports of questionable dealership finance practices. They sought to act before lawmakers approved tougher restrictions.
"This was a 100 percent dealer initiative," says Bob Israel, executive vice president of the Louisiana Automobile Dealers Association. "The only fear among the dealers was that once you bring up the subject of a cap, it would be negotiated down and down and down."
The law generated little opposition - in large part because it likely will have little impact on dealers' finance profits. Most vehicle lenders already cap markups at 3 percent, and typical retail markups are less than that.
"The market is very difficult," Israel says. "You can't just jack up rates at will."
Several industry trade associations advocate disclosures that dealers may make money on retail interest rates. Some lenders include this disclosure in their installment sales contracts.
Other states have considered placing a ceiling on the amount dealers can mark up loan rates. But Louisiana is the only state that has done so, says Jeff Beddow, a spokesman for the National Automobile Dealers Association.
California dealers are fighting proposed legislation that would cap interest-rate markups at 2 percent on vehicle loans of as long as 60 months and at 1 percent on longer loans.
Brian Maas, a lobbyist for the California Motor Car Dealers Association, says his group has had "serious discussions" with state officials about an interest rate ceiling. But the group opposes what Maas calls "highly objectionable provisions" of the bill.
"The dealer would have to charge the same interest rate spread to every customer (in) an entire calendar month," Maas says. "We think that hurts consumers, particularly those who can successfully negotiate low interest rates."
The bill also has provisions that would affect certified used vehicles, aftermarket disclosures and a customer's right to rescind a purchase.
Gov. Arnold Schwarzenegger's administration opposes the legislation.
"This will be progress, curtailing the most abusive practices," says Rosemary Shahan, president of Consumers for Automobile Reliability and Safety, a consumer advocacy group. "Eleven percent markups or higher are still cropping up in cities like Los Angeles."