Markups OK if Equal

The good old days will soon be gone and with them, perhaps, dealer participation in financing. We've reported on the attacks on dealer participation for quite some time now.

There was the class-action settlement in the racial discrimination suit against General Motors Acceptance Corporation and the contract disclosures that GMAC agreed to implement as part of that settlement.

State attorneys general have also been initiating battles against the allegedly abusive practice of dealer participation. The latest attorney general to do so is New York's Eliot Spitzer.

In a recent one-two punch, Spitzer announced an agreement with Albany-based Armory Nissan and proposed state legislation addressing dealer participation.

Pursuant to its agreement with Spitzer's office, Armory will institute a flat-rate fee, fully disclosed to all customers and applied to all customers across the board, as a substitute for dealer participation.

The proposed legislation calls for a similar remedy to what Spitzer calls “racial disparities” in automobile financing.

He characterizes his agreement with Armory Nissan as “landmark.” He complimented the dealership.

“I commend Armory for enacting a new finance charge system that is groundbreaking in the industry,” he says. “These reforms provide a model of fairness and good business practices that all auto dealers should try to match or exceed.”

Armory's agreement with Spitzer covers the next three years. The flat-rate markup that Armory agreed to implement must be the same for every customer. Although the markup rates may vary from time to time, the important thing, says Spitzer, is that they are uniformly applied to all of Armory's affected customers.

He cites a Consumer Federation of America report with respect to average markups paid by African-American and Hispanic car buyers.

He says his office has been investigating auto financing disparities for the last two years and he is attempting to eliminate “racial disparities.”

He says, “Because auto dealers do not disclose the ‘buy-rate’ offered by the lender, consumers often accept interest rates without negotiation, likely due to the misplaced assumption that the quoted interest rate is solely based on credit worthiness.”

To address this perceived evil on a statewide basis, Spitzer proposes legislation that would affect all car dealers in the state.

We got our hands on a draft copy of the bill. It mirrors the agreement struck with Armory. The proposed law requires auto dealers who assist car buyers in obtaining financing to provide “written disclosure” of any fee or other charge for such services, “expressed in dollars.”

The amount of the fee is not dictated, but it must bear a “reasonable relationship” to the dealership's services. The fee may vary from time to time, but all customers must be charged the same fee at all times. When must the disclosure be made? Before the dealer takes any actions to arrange financing.

Prior to execution of the retail installment contract, the dealer must also provide a written disclosure of the lowest “buy rate.” The dealer must retain copies of these written disclosures for three years after the date of the contract. Violation would constitute a “deceptive act or practice” under New York law.

The courts would require violators to pay the car buyer up to three times the amount of the “fee” or “charge” for these services. Interestingly, the measures called for in Spitzer's proposed state law do not apply to automobile lease transactions.

He says, “This practice of ‘dealer markups,’ little known to consumers, has been challenged as racially discriminatory because minorities are more often subject to such discretionary interest rate increases.”

We'll keep an eye on this one. This trend is building momentum. New York is not the first state to act, and we won't be surprised to see other states to do the same.

Thomas Hudson is a law partner with Hudson Cook and editor in chief of CARLAW. He's at 410-865-5400.