rosemary is a one woman crusade to eliminate car dealer loan markup

By Brittany-Marie Swanson

Rosemary Shahan, president of CARS, speaks at the CFPB’s first public forum on auto lending in November.
Rosemary Shahan, president of CARS, speaks at the CFPB's first public forum on auto lending in November.

SACRAMENTO, Calif. — Consumers for Auto Reliability and Safety (CARS), a consumer advocacy group, submitted a new ballot initiative to the California attorney general’s office on Oct. 30. Part of the initiative calls for the elimination of dealer markup, a practice currently being scrutinized by the Consumer Financial Protection Bureau (CFPB).

Rosemary Shahan, president of CARS, discussed the ballot measure during the CFPB’s first public forum on auto lending, held on Nov. 15 at its Washington, D.C., headquarters. The Car Buyers Protection Act is slated to appear on the November 2014 ballot.

“I would note that the provision in the initiative that we just filed … polled at 82 percent support,” Shahan said during the CFPB forum, for which she served as a panelist. “And there isn’t a lot these days that polls so resoundingly well.”

Most industry and regulatory representatives present at the forum, including CFPB Director Richard Cordray, agreed that dealers deserve to be compensated for arranging financing for consumers. The CFPB is concerned that the discretion dealers are allowed when marking up rates creates a fair lending risk. Shahan, however, disagreed.

“I don’t think they should be compensated for that,” Shahan told F&I and Showroom. “It’s something you can do yourself better for free. Why would you pay someone to put you into a bad loan?”

California New Car Dealer Association (CNCDA) President Brian Maas told the magazine that Shahan’s approach is “pretty hard to respond to.”

“The short summary is, is a solution in search of a problem,” he said. “It would have a potentially devastating impact on the new-car business, just to fix things that frankly are going to be resolved one way or another anyway, or don’t need to be resolved at all, or are confusing. So we’re perplexed, frankly. Why this ballot measure at this time?

“Obviously, the CFPB is looking at the issue closely and trying to decide if disparate impact or discrimination exists , and what’s the appropriate compensation scheme and what have you,” Maas added. “But even the CFPB has conceded that dealers should be paid for performing the service.”

In addition to eliminating dealer markup, the proposed Car Buyers Protection Act would make it illegal for dealers to sell, rent, lease or loan recalled used cars, as well as improve protections against “bait and switch” financing and for victims of identity theft perpetrated at car dealerships. The proposed ballot measure would also require that dealers offer a minimum 30-day, 1,000-mile warranty on all used cars.

The initiative also seeks to eliminate the authority of the New Motor Vehicle Board to overrule disciplinary actions against dealers and manufacturers approved by the Department of Motor Vehicles.

“There are a number of problems that have been identified over the years where the public really wants to see change, but the dealers keep blocking it in the legislature either federally, or at the state level,” Shahan said. “And so is aimed at getting these policies enacted through popular vote.”

The advocacy group recently sponsored SB 686, a bill intended to prohibit the sale of unsafe used cars. It was blocked in California’s Assembly Business and Professions Committee in July and cannot be revived until January 2014.

At the CFPB forum, Shahan called California “ground zero” for the issue the CFPB is currently tackling: discrimination in auto lending. California is one of two states that caps dealer markups —2.5 percent for loans up to 60 months and 2 percent for longer loans.

Shahan’s organization’s next step is to meet with the California attorney general’s office, and she said she’s prepared for a long fight. “I expect it to be a battle,” she said. “I imagine the dealers are going to oppose it tooth and nail. But I think at the end of the day, we’ll win. Because … the practices really do not stand up to scrutiny.”

Maas, however, pointed out that the ballot measure may harm the people it intends to protect.

“If dealers don’t provide financing, how does a subprime customer get financed? You can’t walk into a subprime lending intuition; they don’t exist … If I’m a credit challenged customer, it’s the dealer that is working hard to get me financed,” he said. “He’s got an incentive, he wants to sell a car … and that’s why the dealer financing model works.

“We’re a bit frustrated,” Maas added. “It’s not clear at this point how much support has for the measure, other than the fact that she spent $200 to file it with the attorney general.”