Deal or No Deal? NC Auto Dealers Stand in the Way of a Fair One By Adding Thousands of Dollars to a Car's Cost

DURHAM, N.C., April 30 Kickbacks to auto dealers cost North Carolinians $665 million in unnecessary interest payments on new and used cars bought in 2007, according to research from the Center for Responsible Lending. "Car Trouble: Predatory Auto Loans Burden North Carolina Consumers" reveals common industry practices hidden from public view that make many car loans a bad deal for consumers.

Dealers are paid a kickback from the lender for getting the buyer to pay a higher interest rate than that for which the buyer qualifies. The kickback is financed by the excess interest the buyer pays over the life of the loan, and the extra profit is either split between lender and buyer or pocketed entirely by the dealer.

"This is taking advantage of car buyers in the worst way, along with taking their hard-earned money each and every payment," said Chris Kukla, senior counsel for government affairs, of the Center for Responsible Lending. "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."

The data in "Car Trouble" was derived from auto industry sources and consumer survey results commissioned by CRL. The survey of more than a thousand adults enabled CRL to gain further perspective on auto lending and confirmed the pervasiveness of "yo-yo" scams in the marketplace. "Yo-yo" scams occur when the buyer is placed in a conditional sale agreement at the dealership with the understanding that the deal is final. The transaction becomes a "yo-yo" when the buyer is called back in to the dealership and is told that the sale cannot be made as agreed. At that point, the buyer is told that his or her trade-in has been sold. The only choice is to be without a car or agree to the more expensive financing. None of this would occur if not for the dealer kickback.

CRL's survey found that a quarter of low-income survey respondents have experienced "yo-yos." This practice leads to a 5 percentage point higher interest rate on average for borrowers who can least afford it.

CRL supports legislation in the NC General Assembly, HB 1223, which does the following to protect North Carolina consumers:

  --  Bans Dealer Kickbacks:  Ban the back-end compensation dealers receive
      for selling more costly loans to consumers.
  --  Prohibits "Yo-Yo" Scams:  Prohibit yo-yo scams and ensure more
      meaningful enforcement to prevent them.

  --  Addresses "Loan Packing":  Provide a consistent and transparent means
      of presenting the cost of the vehicle, all fees, and add-on product
      sales.

  The authors of "Car Trouble" are Delvin Davis and Joshua M. Frank.