Overview

Deceptive Lending
In a hidden practice known as the "dealer markup" car buyers who arrange financing through dealerships often get percentage points tacked on to their loan that can cost thousands of dollars above the market price of their car.

Lenders, who are complicit in this setup, kick back most of the markup to the dealer, while the customer remains unaware. A January 2004 report by Consumer Federation of America estimated the markup impacts as many as 1 in 4 car buyers for whom dealers arrange financing, and that these overcharges cost consumers at least $1 billion annually.

But if you are Black or Hispanic, the tale of this rip-off is even worse.

Industry data show that African-Americans and Hispanics pay on average higher markup fees than their marked-up White counterparts. For example, according to a Nation Consumer Law Center report on lending at the dealer by Honda finance shows that 66.7% of Whites were charged the markup, as compared to 72.9% of Hispanics and 86.7% of African-Americans. The average markup for a White Honda customer was a pricey $666.55, but the average markup paid by Hispanics is $857.63 and for African-Americans it's a whopping $1127.69.

The auto loan markup results in customers paying arbitrary and hidden fees.

Even a markup of 2.5 percentage points (adopted by some dealers in anticipation of legal and legislative action) could still increase finance charges by more than $1,000 per loan beyond what a customer's credit score would warrant.

Dealers respond that they should be fairly compensated for their service in helping consumers arrange loans. But the fee for that service should not be hidden or arbitrarily tied to the size and the length of a loan – and it certainly should not be discriminatory.

Misleading Marketing
Manny used car dealerships use the term "certified pre-owned vehicle" or "certified used" as a marketing ploy to convince consumers the car has passed a state sanctioned test or as justification for price markups over a normal used car price. Consumers are confused by the term because they are under the false assumption that it is a designation that comes when a used vehicle passes a set of industry-wide or government approved standards. But it is not.

The term "certified" is purely a marketing gimmick used by car dealers to make it seem like their cars meet a higher standard. In reality, there is no basis of comparison between car dealerships that claim to have "certified" cars. The term therefore, is meaningless.

When a car dealer says one if its automobiles is "certified," this designation applies to a set of guidelines that the car needs to fulfill.

However, each dealer independently sets these standards. There are no uniform industry-wide limits on the age of the car or its mileage at resale, there are no standards for a warranty, and when a dealer claims to have put each car through a multiple "points inspection," there is no universal description for what constitutes each "point." Since each dealership has their own definition of "certified," it is impossible to compare cars between dealers.

MASSPIRG looked at the ages and mileages of various cars being sold by Massachusetts dealerships under the label "certified." The ages of these cars ranged dramatically from a couple months to eight years, and similarly the mileages were at times as low as a few thousand miles and as high as ninety thousand miles (see appendix "Certified Pre-Owned Programs in MA").

The Car Buyers Bill of Rights would:

Cap Dealer Markups: The bill would fairly compensate dealers by replacing the markup with a clearly disclosed reasonable fee of .5% of the loan amount or $150, whichever is lower.

Define Certified Used Car: The bill sets minimum standard for the term "certified used car".

Establish a Cooling Off Period: The bill establishes a 3-day "cooling off" period for buyers of used cars who after thought and review may decide to return the car without penalty.