California Gov. Gray Davis has signed a bill designed to curb dealer finance markups in the state. It allows the state to track the amount of interest rate markup -- point spread, in industry parlance -- that auto dealers charge customers in California.

The bill allows the state attorney general to take action on markups seen as "excessive." According to some industry observers and attorneys, minorities have been among those most affected by such markups.

Many dealerships defend the practice as a legitimate profit for services provided, maintaining that dealer markup is qualitatively no different than other retail-to-wholesale markups.

When a captive finance company or bank approves a loan rate which is then marked up by the dealer, the dealership makes a cash profit, known as a point spread, from the extra interest. This amount is usually pocketed by the dealership, but is also sometimes split with the finance company.

Gov. Davis signed the law July 14. It mandates that California auto dealers keep copies of all lending contracts for at least seven years or the length of the loan -- whichever is longer. Dealerships must also provide the information upon a court order or an administrative subpoena by the California attorney general.

Fines for noncompliance are $5,000 per violation.

"Many consumers are deceived into paying excessively high interest rates when purchasing a car, especially African-Americans and Latinos," Gov. Davis said July 16. "This bill will allow the attorney general to end this unfair practice that tacks on thousands of dollars to the price of a car."

According to some consumer groups that follow the issue, the new law is the first in the nation to target discriminatory lending that can result from dealer finance markups.

Many car buyers around the country pay thousands of dollars extra because of the dealer markup, which is either unknown to or little understood by typical buyers. Though the markup is often paid by car buyers of all ethnicities, it can be most pronounced for minorities, in which case it can violate federal law that prohibits discriminatory lending practices.

Many of the captive 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. Car loan applications do not indicate the race of the potential buyer.

In February, Nissan's captive finance unit, Nissan Motor Acceptance Corporation (NMAC), settled with black and Hispanic car buyers who alleged the company was discriminating against them by charging unduly high interest rates.

"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," Rosemary Shahan, president of Consumers for Auto Reliablity and Safety, told the New York Times. Shahan's group brought the dealer markup practice to the attention of State Senator Martha M. Escutia, a Democrat from the Los Angeles area who became the bill's author.

As a result of past 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 percentage points.

As part of NMAC's settlement, the company agreed to offer preapproved loans to hundreds of thousands of minority customers and to limit markups. The company also gave $1 million to charity and paid $5,000 to $20,000 to each of the 10 plaintiffs.

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