July 16, 2003

Gov. Gray Davis of California has signed into law a bill to curb outsize interest rates that car dealers sometimes charge minority customers.

The new statute, say consumer groups that follow the issue, is the nation's first to take aim at discriminatory lending that can result from a practice known as the dealer markup. In a dealer markup, car dealers raise interest rates above the rates they are quoted by auto lending giants or other big financing companies. The dealers pocket the proceeds of the difference, or split them with the financing companies.

Large numbers of car buyers around the country pay thousands of dollars extra because of the dealer markup, which is invisible to typical buyers and little understood by them. Though the markup is often paid by car buyers of all ethnicities, it can be most pronounced for minorities, in which case it runs afoul of federal law that prohibits discriminatory lending practices.

Most of the big lending companies operated by automakers have been sued for the practice, though they are not accused of directly discriminating themselves, because they typically do not know the race of the buyer; only the dealer does. In February, Nissan's finance unit, the Nissan Motor Acceptance Corporation, reached a settlement with black and Hispanic car buyers who said the company was discriminating against them by charging unduly high interest rates.

"Many consumers are deceived into paying excessively high interest rates when purchasing a car, especially African-Americans and Latinos," Governor Davis, who signed the new statute on Monday night, said in a statement issued yesterday.

"This bill," the governor added, "will allow the attorney general to end this unfair practice that tacks on thousands of dollars to the price of a car."

The new law requires auto dealers to keep sales records on file for seven years or the life of a loan, whichever is longer, and to retain information on how a person's creditworthiness was determined. Fines for noncompliance are $5,000 a violation.

The bill is meant to give the state attorney general's office a paper trail to detect the existence of any abusive practices, which could mean litigation under the federal anti-bias law.

A spokesman for the National Automobile Dealers Association did not return calls seeking comment. A spokesman for the Alliance of Automobile Manufacturers said he had not yet reviewed the bill. By the time the statement from Governor Davis's office about the bill's enactment was issued yesterday, it was late in the day on the East Coast, where those two groups are headquartered.

Rosemary Shahan, president of Consumers for Auto Reliability and Safety, said of car dealers and the markup practice, "Everyone they think they can do it to, they do."

"They mark up just about everybody who finances through the dealer, but the amount tends to be more if you're African-American or Latino," said Ms. Shahan, whose group took the matter to State Senator Martha M. Escutia, a Democrat from the Los Angeles area who became the bill's author.

As a result of litigation, many of the big auto lending arms, like the General Motors Acceptance Corporation and the Ford Motor Credit Company, have capped dealer markups at 3 percent.

And under terms of Nissan's settlement, the company agreed to offer preapproved loans to hundreds of thousands of minority customers and to limit markups. The company also donated $1 million to charity and paid $5,000 to $20,000 to each of the 10 plaintiffs.

Linda White of Murrieta, Calif., was not involved in the suit against Nissan and its finance arm, but she learned as a result of it that the interest rate on her 1996 Nissan Altima had been marked up 1.5 percentage points by a dealer in Oceanside, Calif.

Ms. White, who is African-American, said she did not know whether her race had been a factor in the decision to tack the extra charge onto her auto loan. But she said she welcomed the new California law, which will allow the authorities to track transactions like hers to see whether auto dealers are discriminating against black and Latino buyers.

"I don't think it's right for them to be able to do that without the consumer's knowledge," Ms. White said. "I felt taken by that, regardless of my race. That they could mark up my interest rate and not tell me, I just think that's wrong."

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