House bill targets automobile loan practices

"Car Trouble," a new report from the Durham-based Center for Responsible Lending, says North Carolina car buyers are mistreated by some "predatory" auto dealers who finance their auto loans.

The advocacy organization endorses House Bill 1223, sponsored by Raleigh Rep. Dan Blue, which targets practices the group calls dealer kickbacks, "yo-yo" scams and loan packing.

A spokesman for the state’s new-car dealers called the legislation unfair and the center’s report “horribly misleading.”

Here's how the Center for Responsible Lending describes these practices:

* Dealer kickbacks. The customer initially qualifies for a certain interest rate from the lender, but the dealer charges a higher rate and later splits the added interest payment income with the lender. In a press release from the Center for Repsonsive Lending, lobbyist Chris Kukla said:

“This is taking advantage of car buyers in the worst way, along with taking their hard-earned money each and every payment. What’s worse is car dealers are not even required to disclose marked up interest rates to buyers under state law. Rather, they only need to post a sign somewhere in the dealership that states you may have received a higher interest rate.”

* Loan packing. Dealers inflate the loan price with overpriced add-on products.

* Yo-Yo scams. The buyer signs a conditional sale agreement and drives home. Later the dealer says the loan cannot be financed at the terms they had agreed upon, and the buyer's trade-in car has already been sold. The buyer is pressured to return to the dealership and to accept more expensive terms with a higher interest rate.

Blue's bill, which will be discussed next week in the House Commerce Committee, would require dealers to give buyers more detailed information about the separate prices of add-on items included in loan packages. It would make it easier for buyers to cancel a sale before it is final, and it would bar dealers from getting kickbacks from lenders based on the loan interest rate.

Robert Glaser, president of the N.C. Automobile Dealers Association, criticized the legislation and the center's report.

“It’s a horrible time in the industry to all of a sudden be picking on the car dealer and say this is a kickback, which makes it sound illegal,” Glaser said. “In every dealership a sign is posted, and consumers know this, that says the dealer may be compensated for arranging financing.”

Glaser said consumers are always welcome to finance their purchases independently, but dealers often get get them better loan rates “because of the dealer’s relationships with the lenders.”

What critics call a yo-yo is what dealers call a “spot delivery,” Glaser said. A buyer might be eager to take the car home on a Friday night or weekend, so the dealer takes a risk, he said. He offers tentative terms that might change after the banks open Monday morning and the buyer’s creditworthiness is checked, Glaser said.