DETROIT--The means to bettering F&I dealers' reputation is more disclosure and consumer education about financing, said Charley Smith, chairman of the National Automobile Dealers Association. He added that mandating flat fees or caps on finance charges "is not the answer."

The current controversy over markups is largely due to the fact that consumers don't know that interest rates are negotiable and that the dealer may be compensated for arranging financing. "NADA supports disclosure of that information to car buyers," wrote Smith in a May 3 column for Automotive News. "We have nothing to hide. The fact that a dealer is compensated for obtaining financing should come as no surprise."

Some critics want to force dealers to reveal the percentage or dollar amount of the markup. Smith said such a requirement would be misguided, discriminatory and possibly counterproductive. He explained that the Federal Reserve Board decided against requiring such disclosures as a part of the Truth in Lending Act because they wouldn't have significantly helped customers in shopping for credit.

"Instead, the Fed found that disclosing the total finance charge, the annual percentage rate and the periodic payment--all required by Reg Z--together with the widespread advertisement of credit terms, gives consumers the most important information they need to shop for credit," added Smith.

Along with disclosure, dealers and the auto finance industry must be proactive about educating consumers. To that end, NADA, the American Financial Services Association and the Federal Trade Commission developed a brochure that explains vehicle financing to car buyers. Understanding Vehicle Financing is available at over 20,000 dealerships and www.nada.org.

Dealers must also watch what they say to customers. Promising "the best possible rate" can inflate customers' expectations. "A better approach would be to say, 'We will do our best to beat the bank or credit union,'" said Smith. Dealers must have a policy of being open and honest and enforce it among employees.

Regarding markup caps and flat fees, Smith said the question of which is best should be left to each dealer and lender.

"What must be avoided are knee-jerk responses to a complicated issue," he added.