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Car loan 'truth' proposal ready
By Rick Popely and Ray Long
Tribune staff reporters
January 29, 2004
Auto dealers would have to tell consumers how much profit they make on loans for new and used vehicles under legislation Illinois Atty. Gen. Lisa Madigan will unveil Thursday.
If Madigan's "Truth In Auto Financing" proposal becomes law, Illinois would be the only state that requires dealers to disclose how much they charge consumers above the "buy rate" the dealer pays to obtain a loan.
With the average new-vehicle loan at about $22,000, marking up the interest rate by three points, to 8.5 percent, say, adds $1,868 to the consumer's cost over five years, the typical loan term.
Stephen Brobeck, executive director of the Consumer Federation of America, predicted that a disclosure law would significantly reduce markups.
"I can't imagine that anyone would accept a loan if they were told the interest rate was being marked up," Brobeck said. "The markups have continued simply because of a lack of awareness."
Madigan's announcement comes three days after the federation charged that one-fourth of new vehicle loans issued through dealers are secretly marked up and that minority consumers are more likely to be charged higher rates than whites.
Madigan's proposal has been in the works for months.
Federal regulations require that consumers be told the annual percentage rate on a loan but do not cover dealer markups.
Madigan's proposal will be introduced in the spring session of the General Assembly and is expected to ignite fierce debate.
"A dealer is entitled to a profit, and I don't know of any other business in which a profit margin has to be disclosed," said Jerry Cizek, president of the Chicago Automobile Trade Association, which represents more than 700 Chicago-area new-car dealers.
"We hope we can work with the attorney general's office to find other means of protecting the consumer," he said.
Dealers are a powerful lobby. They generated 13 percent of the state's $9.4 billion sales tax revenue last year.
Other retailers also may fight the proposal for fear it could be expanded to cover other installment contracts, such as loans on carpeting or furniture.
State Rep. Marlow Colvin (D-Chicago), a leader of the Legislative Black Caucus and chief sponsor of the legislation in the House, says Madigan is on the "right page" because the bill would alert shoppers that they might get a lower interest rate elsewhere.
In a memo this week to legislators, the attorney general's office said: "The dealer may add a markup of several percentage points to the buy rate offered by the lender. This difference, or markup, may be split between the dealer and the lender.
"While this practice can affect all consumers, it has a disproportionate impact on African-American and Latino car buyers," the memo said.
Recent lawsuits have accused finance units of carmakers and banks of discriminatory lending practices.
In response, car firms and most banks voluntarily capped the dealer markup at 3 percent above the buy rate, but Brobeck says that is too high.
He favors limiting dealers to a flat fee of $150 to $200 to cover costs of obtaining a loan and to reduce discrimination.
Consumer advocates in California are pushing for a ballot proposition in November that would limit dealer finance profits to $150 per loan.
Dealers typically send a credit application to several lenders and offer the car buyer what they say is the best rate. There is no requirement that they disclose rates offered by other lenders.
Greg Merryman, an attorney with GMAC, the finance unit of General Motors Corp., argues that competition among lenders and dealers has reduced the average markup on GMAC loans to less than 1.5 percent.
"There is plenty of opportunity for consumers to comparison shop and to take a look at the whole package they're getting from a dealer," Merryman said. "This is a very competitive business, and it is getting more competitive as people have more information available to them."
CNW Marketing Research in Bandon, Ore., estimates that half the 16.7 million new vehicles sold last year were financed at dealerships, but only one-third of consumers shopped for a loan from more than one source.
Auto industry analyst Art Spinella, president of CNW, says that even with markups on loans, dealers may beat the rates offered by other lenders.
Copyright © 2004, Chicago Tribune
By Rick Popely and Ray Long
Tribune staff reporters
January 29, 2004
Auto dealers would have to tell consumers how much profit they make on loans for new and used vehicles under legislation Illinois Atty. Gen. Lisa Madigan will unveil Thursday.
If Madigan's "Truth In Auto Financing" proposal becomes law, Illinois would be the only state that requires dealers to disclose how much they charge consumers above the "buy rate" the dealer pays to obtain a loan.
With the average new-vehicle loan at about $22,000, marking up the interest rate by three points, to 8.5 percent, say, adds $1,868 to the consumer's cost over five years, the typical loan term.
Stephen Brobeck, executive director of the Consumer Federation of America, predicted that a disclosure law would significantly reduce markups.
"I can't imagine that anyone would accept a loan if they were told the interest rate was being marked up," Brobeck said. "The markups have continued simply because of a lack of awareness."
Madigan's announcement comes three days after the federation charged that one-fourth of new vehicle loans issued through dealers are secretly marked up and that minority consumers are more likely to be charged higher rates than whites.
Madigan's proposal has been in the works for months.
Federal regulations require that consumers be told the annual percentage rate on a loan but do not cover dealer markups.
Madigan's proposal will be introduced in the spring session of the General Assembly and is expected to ignite fierce debate.
"A dealer is entitled to a profit, and I don't know of any other business in which a profit margin has to be disclosed," said Jerry Cizek, president of the Chicago Automobile Trade Association, which represents more than 700 Chicago-area new-car dealers.
"We hope we can work with the attorney general's office to find other means of protecting the consumer," he said.
Dealers are a powerful lobby. They generated 13 percent of the state's $9.4 billion sales tax revenue last year.
Other retailers also may fight the proposal for fear it could be expanded to cover other installment contracts, such as loans on carpeting or furniture.
State Rep. Marlow Colvin (D-Chicago), a leader of the Legislative Black Caucus and chief sponsor of the legislation in the House, says Madigan is on the "right page" because the bill would alert shoppers that they might get a lower interest rate elsewhere.
In a memo this week to legislators, the attorney general's office said: "The dealer may add a markup of several percentage points to the buy rate offered by the lender. This difference, or markup, may be split between the dealer and the lender.
"While this practice can affect all consumers, it has a disproportionate impact on African-American and Latino car buyers," the memo said.
Recent lawsuits have accused finance units of carmakers and banks of discriminatory lending practices.
In response, car firms and most banks voluntarily capped the dealer markup at 3 percent above the buy rate, but Brobeck says that is too high.
He favors limiting dealers to a flat fee of $150 to $200 to cover costs of obtaining a loan and to reduce discrimination.
Consumer advocates in California are pushing for a ballot proposition in November that would limit dealer finance profits to $150 per loan.
Dealers typically send a credit application to several lenders and offer the car buyer what they say is the best rate. There is no requirement that they disclose rates offered by other lenders.
Greg Merryman, an attorney with GMAC, the finance unit of General Motors Corp., argues that competition among lenders and dealers has reduced the average markup on GMAC loans to less than 1.5 percent.
"There is plenty of opportunity for consumers to comparison shop and to take a look at the whole package they're getting from a dealer," Merryman said. "This is a very competitive business, and it is getting more competitive as people have more information available to them."
CNW Marketing Research in Bandon, Ore., estimates that half the 16.7 million new vehicles sold last year were financed at dealerships, but only one-third of consumers shopped for a loan from more than one source.
Auto industry analyst Art Spinella, president of CNW, says that even with markups on loans, dealers may beat the rates offered by other lenders.
Copyright © 2004, Chicago Tribune
