Top News

Consumer Group Seeks to Eliminate Rate Markups in California

December 3, 2013

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. 14 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 [aimed at eliminating dealer markup] 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, [the initiative] 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 [in auto lending], 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 [this initiative] 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 [Shahan] has for the measure, other than the fact that she spent $200 to file it with the attorney general.”   


  1. 1. Larry Laskowski [ December 03, 2013 @ 02:00PM ]

    It needs to be noted that Shahan is circumventing the liberal California legislature, which should be a clue to everyone how far out in left field her ideas are. Part of this proposed measure would also require dealers to perform safety recalls on used vehicles before sale. At the federal level, manufacturers have been required to create a vin-searchable database for open recalls which is due to be completed by August 2014. A specialist in unsubstantiated claims, Shahan blames auto dealers for selling unsafe vehicles, but the measure only addresses used vehicles on dealers lots, which total less than 5% of the vehicles on the road in California. If this measure is about safety, why not include the other 95%? After all, the trade-ins that dealers acquire wouldn't have open recalls if the consumers who owned the vehicles previously wouldn't have ignored the notices from the manufacturer.

  2. 2. RICKYRAINMAKER [ December 03, 2013 @ 05:32PM ]

    I guess your calling some 15 million car buyers victims .This is called price fixing and illegal! profit as long as it's disclosed properly isn't a bad word .I don't believe anyone works for free.The hand outs and free lunches are over get a grip! We provide a service and should be compensated .Why would we trust some blow hards that have pensions on Capitol Hill to make decision on any financial issues ? EVER This is a silly non issue one sided debate of people that can't balance their OWN check books .The Auto industry is one of the bright spots of our economy MIND YOUR OWN BUSINESS AND LET US DO OUR'S ...

  3. 3. Lee [ December 04, 2013 @ 11:46AM ]

    How can this be the response to her stating "why should you pay someone to do something that you can do for free"?

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

    1) Some lenders allow rate markdowns now, as opposed to rate markups. i.e., Huntington National Bank will pay dealerships 5% of the loan size if sold at the approved rate... while allowing smaller payouts, if the dealer chooses to offer discounted rates during the negotiations... to make a car deal happen as a win/win for both parties.

    2) Consumers aren't always paying us in the form of a higher interest rate. As an example, I regularly see consumers with 720+ credit scores that can get their own financing at rates equal to or greater than what I can get them... while my rate is fully marked up (+2%). So, her argument that a consumer is paying us for a service that clients can get for free... can actually cause California residents to pay higher interest rates due to local banks taking advantage of those with good credit.

    3) As Larry stated above, many consumers such as first-time buyers, subprime customers, foreign nationals, consumers with negative equity and a myriad of other potential landmines can be denied credit... causing a much greater problem than a 0.39% rate disparity founded by a CFPB report.

    The bottom line is that what's really fueling this rally cry is the "better credit left or right" want the lowest interest rates possible. And good for them! But they'll crush the future economic landscape for employees of dealerships, manufacturers and their subsidiaries if their agenda is allowed to pass.

    I feel that Brian Maas & other industry leaders need to be much more prepared & gain support from the auto manufacturers, subsidiaries & subprime constituents... as opposed to being a "deer caught in headlights" with so much at stake.

    That's my 2 cents...

  4. 4. Lee [ December 04, 2013 @ 11:51AM ]

    PS - I'm not sure where she's coming from about unsafe cars being sold. I believe that every car dealer does or tries to perform all recall work prior to being offered for sale... especially since many dealers collect payments for the recall work... with the exception of used car dealers.

    I wouldn't be opposed to mandating that 100% of recall work is performed prior to being offered for sale.

    And the Dodd-Frank & Graham-Leach-Bliley Acts already provide clear guidelines for red flag detection, to protect victims from Identity Theft.

  5. 5. Bubba B [ December 16, 2013 @ 08:16AM ]

    Next thing Shahan will seek to ban is trade-ins during the purchase of a new vehicle becuase people can get more from a private party sale.

  6. 6. deb [ December 21, 2013 @ 10:24AM ]

    All the people sit in the higher chairs and do not really understand what the everyday person needs or goes through. Why is all the direction always pointed at the auto industry. Where were they when the real estate industry almost took down the US. where are they when a real estate loan has all the small hidden fees that have to be paid at a much higher % then a 15000.00 car loan? I'm curious do they really calculate how much 2 points equals on 375000 or even 1million? now to me that is a crime and taking advantage of a conusmer to make 350- 750 in reserve and say that you are taking advantage of consumers is ridiculous. There are consumers that can notget loans that can only be done through dealerships because of the relationships they have with lenders taking a risk... I am not sure this lady actually knows what goes on in a car dealership and it gets kind of tiring listening and them comparing it to 20 years ago when there where not all the regulations and guidelines and restrictions that dealers are in. The no markup will not only hurt dealer but will hurt lenders- it all works hand in hand and the auto industry is one of the most positve markets in the nation - it has done more for the economy than most realize!

  7. 7. Sammy khadka [ December 22, 2013 @ 06:58AM ]

    Shahan Rosemary Your cause is Baseless ,clueless and Nonsences..Stop this NOW!!infact you do not care for people are making your concern in New Car Business ...with all the technology available now you think new car business is profitable???50 percent is Lease ...Finance is about 35 percent and rest is cash ..where do you see to eliminate 2.....Keep in mind Business Manager is Commission job 100 percent how do you expect them to feed their family????Do you work their for free shahan??????

  8. 8. R R Longpre [ December 27, 2013 @ 08:22AM ]

    As a new car dealer I provide a valuble service to my customers. I establish and maintain banking and leasing relationships and data basis so I can offer my customers hundreds of different sources for their loan or leases. They in turn are free to shop what I offfer. If they can find a better deal, which is seldom, they are free to take it. Often, I can find financing when the buyer failed to find anyone willing to accept his contract. I feel that I am like any other loan broker. I sell a valuble service and make a profit. The competitive market place keeps my margins tight.

  9. 9. Motz [ January 04, 2014 @ 11:12AM ]

    Shahan says- “It’s something you can do yourself better for free. Why would you pay someone to put you into a bad loan?”

    Seriously!!? Shahan's perception is the problem. She clearly needs an education in the auto industry. YES- customer can and do obtain their own financing. The question is, do they know where and how to get the best deal?

    Does the average consumer know which lenders cater to their specific credit needs? Do they know how to make the most out of their budget? Are they able to find the best rates? The answer is almost always NO!

    What if the lender they choose doesn't offer a loan on the car that would best fit their needs? Maybe the car of their dreams has too many miles? Maybe the car they choose would require too much down or the limited term makes the payment unaffordable?

    It happens ALL the time. A customer comes in with a pre-approval and picks a car that won't work with the financing they have been offered. They are either forced into settling for a car that fits their approval or they can CHOOSE to let us help them into what they want and or need. With our lender relationships and knowledge of the business, we are often able to offer consumers much lower rates and help them get into a better, safer more reliable car for less. Even the great credit customers tend to switch from their own financing to ours because 9 times out of 10, we beat their rates.

    Shahan- yes, limit the number of points we are able to mark a rate up. WAIT they already have! Some states have mark-up policies and all of the banks I use have their own policies limiting mark-up as well. The days of making over 2.5 points are already over. What you are fighting for will most certainly have a negative impact on the consumers you are trying to protect. Let the experts in this field do their jobs. This is what we do every day. We offer valuable knowledge and should be compensated for our services.

  10. 10. John Sulano [ January 04, 2014 @ 12:12PM ]

    She probably has bad credit and was turned down. Consumers always have had the ability to secure their own financing if they can. They can buy used cars from a private owner. They go to dealers because we provide a service, get them approved, and in some cases fight for them on their behalf. Private owners do not offer free warranties on used cars. Dealers offer free warranties and ESP's are available. We provide a great service to the masses. Are we supposed to do all this for free? Gimme a break!

  11. 11. V. Stern [ December 10, 2014 @ 12:59PM ]

    WOW, this lady is really out in NEVER NEVER LAND!! So if you are a dealer, NEW or USED and you take in a trade that has a recall on it, several of which are national recalls and the parts for the vehicle are not available, the dealer would have to sit on this inventory until the parts are become available, hmm or maybe the dealer will just lowball the trade so low the customer cannot afford to purchase another vehicle. How will this affect the economy? What is the time line for replacing the current airbag recall? And if you are not a franchised dealer for the recalled vehicle, you cannot repair them, you would have the added expense of taking the vehicle to the franchised dealer for repairs, when all along it is the current owner’s responsibility to have this completed.

    What about a private sale of a vehicle with a recall, good luck getting rid of it.

    As stated above by other comments, does Rosemary Shahan work for free? Does she get gas with no markup, how about her mortgage, the lavish vacation trips or jewelry she buys? Does her local bank work with no profit margin?

    Several states and yes the federal government, runs in the red every year, politicians can just cut programs or increase taxes and they want dealers to run the red and go out of business? I guess politicians take the attitude that the voters are too stupid to realize what they are voting on like Obama Care.


Your Comment

Please note that comments may be moderated. 
Leave this field empty:
Your Name:  
Your Email:  



NADA Report: Cash Incentives Negatively Influence Used-Car Pricing

New-vehicle cash incentives reduce the price of used vehicles significantly more than finance and lease incentives, the NADA finds.