BILL ANALYSIS Ó
AB 1447
Page 1
Date of Hearing: April 24, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1447 (Feuer) - As Introduced: January 4, 2012
As Proposed to Be Amended
SUBJECT : AUTOMOBILE SALES FINANCE: SELLERS
KEY ISSUE : IN LIGHT OF REPORTEDLY UNFAIR AND ABUSIVE BUSINESS
PRACTICES COMMONLY EMPLOYED BY "BUY-HERE PAY-HERE" CAR DEALERS,
SHOULD CALIFORNIA CONSUMERS BE ENTITLED TO A MINIMUM 30-DAY
WARRANTY AND OTHER BASIC CONSUMER PROTECTIONS FOR VEHICLES THAT
THEY PURCHASE OR LEASE FROM SUCH DEALERS?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
According to the author, the typical business model of so-called
"buy-here, pay-here" (BHPH) car dealers is to stock and sell
older, high-mileage vehicles to consumers who cannot otherwise
qualify for conventional auto loans. Unlike traditional new and
used car dealers, BHPH dealers do not assign sale and lease
contracts they generate to third party finance or lease sources.
Because they maintain and administer their own sales and lease
portfolios, they do not have to comply with underwriting and
loan policies set by traditional lenders, and thus are free to
set financial terms that are significantly higher than
conventional auto loans and leases. Recent reports by consumer
advocates and the Los Angeles Times have documented a number of
questionable practices used by BHPH dealers that, in the
author's view, should no longer be permitted to continue without
the addition of crucial consumer protections.
As proposed to be amended, this bill seeks to establish a number
of common-sense consumer protections for vehicles purchased or
leased from BHPH dealers, including, importantly, a 30-day
minimum warranty and restrictions on the use of electronic
tracking technology to track a buyer's whereabouts and the use
of ignition shutdown technology to remotely disable the buyer's
vehicle. In addition, this bill would no longer allow these
dealers to require the buyer to make payments in person.
Consumer advocates strongly support this bill because they
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believe it will prevent abusive practices in the BHPH industry
that are especially harmful to the predominantly low-income
buyers who appear to be most frequently victimized, and who can
least afford the loss of a car needed to keep a job. This bill
is strongly opposed by the National Independent Automobile
Dealers Association (NIADA) who contend that this bill will
create a disincentive for BHPH dealerships to remain in
business, and thus will make it more difficult for consumers who
need reliable vehicles to get to their jobs to obtain reasonable
automotive financing. Finally, amendments proposed by the
author to allow the use of electronic tracking and ignition
shutdown technology if written consent is obtained from the
buyer are believed to have now removed opposition to the bill
from PATA, a trade group representing the makers of such
technology.
SUMMARY : Establishes basic consumer protections for vehicles
bought or leased from "buy-here-pay-here" automobile dealers.
Specifically, this bill :
1)Defines "buy-here-pay-here dealer" to mean a seller who enters
into conditional sale contracts or lease contracts, as
defined, and does not routinely assign those contracts to an
unaffiliated third-party finance or leasing source.
2)Prohibits a buy-here-pay-here dealer, after selling a vehicle,
from tracking that vehicle with electronic tracking technology
without obtaining written consent from the buyer.
3)Prohibits a buy-here-pay-here dealer, after selling a vehicle,
from disabling that vehicle by using ignition override
technology, unless the dealer complies with both of the
following:
a) Notifies the buyer, in writing, at the time of the sale
that the vehicle is equipped with ignition override
technology, which the dealer can use to shut down the
vehicle remotely.
b) Ensures that the ignition override technology on that
vehicle provides a warning to the driver that the vehicle
will become inoperable no less than 120 hours prior to the
vehicle being disabled and for a duration of no less than
20 seconds every time the vehicle is started within the 120
hour period.
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4)Prohibits a buy-here-pay-here dealer from requiring any buyer
from making payments to the seller in person, except for the
down payment.
5)Provides that any violations of items (2) through (4) above
are punishable as a misdemeanor.
6)Prohibits a buy-here-pay-here dealer from selling or leasing a
used vehicle unless that dealer gives the buyer or lessee a
written warranty having a duration of at least 30 days from
the date of the contract or when the odometer has registered
1,000 miles from that shown on the contract, whichever occurs
first. Further provides that a buy-here-pay-here dealer that
fails to provide the warranty shall be deemed to have provided
the warranty as a matter of law.
7)Requires the above warranty to provide that the
buy-here-pay-here dealer must repair the failure of any
covered part, as specified, or at the election of the dealer,
instead provide reimbursement for the reasonable cost of
repairing the failure of the covered part. Further permits
the warranty to contain certain exclusions from coverage, as
specified.
8)Requires a buy-here-pay-here dealer, if notified by the retail
buyer or lessee within the specified warranty period that the
vehicle does not conform to the written warranties and the
nonconformity is not otherwise excluded from coverage, to
either repair the vehicle to conform to the written warranties
or cancel the sale or lease contract.
9)Provides that any agreement entered into by a buyer for the
purchase or lease of a used vehicle which waives, limits, or
disclaims the rights set forth with respect to this warranty
shall be void as contrary to public policy.
EXISTING LAW :
1)Sets forth, under the Rees-Levering Act, requirements with
regard to disclosures required in a conditional sale contract
for the sale of a motor vehicle, including specified
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disclosures regarding finance charges, and sets forth the
permissible fees and charges in an automobile conditional sale
contract for the sale of a motor vehicle. (Civil Code Section
2982.)
2)Requires all car dealers to provide a document indicating the
price of specified items purchased, (including, among other
things, any service contract, insurance product, debt
cancellation agreement, or theft deterrent device) and stating
the cost of the monthly installment payments with and without
the items listed. Further prohibits the dealer from adding
charges to the contract without full disclosure to and consent
of the purchaser. (Civil Code Section 2982.2.)
3)Requires a car dealer, before offering a used vehicle for sale
to a consumer, to display a window sticker called the "Buyers
Guide" that must, among other things, disclose whether any
warranty is offered and the basic terms of any warranty. If
no express warranty is provided, then the Buyers Guide must
indicate that the vehicle is being offered for sale "as is"
(with no express or implied warranties), or with only the
applicable "implied warranties" required by state law. (Title
16, Part 455.3 of the Code of Federal Regulations.)
4)Requires used car dealers, at the time of sale, to give the
buyer the original Buyers Guide displayed on the vehicle or an
accurate copy that contains all of the required disclosures
and reflects the final warranty terms agreed on between the
buyer and seller. (Title 16, Part 455.3 of the Code of
Federal Regulations.)
5)Require a car dealer selling a used vehicle for a purchase
price under $40,000 to offer the buyer a 2-day contract
cancellation option agreement, priced as specified, and under
which the buyer may return the vehicle without cause so long
as certain conditions are met. (Vehicle Code Section
11713.21.)
COMMENTS : Recent reports by consumer advocates and the Los
Angeles Times have documented a number of questionable practices
used by so-called "buy-here, pay-here" (BHPH) car dealers that,
in the author's view, should no longer be permitted to continue
without some basic consumer protections for the predominantly
low-income car-buyers who appear to be most frequently
victimized by these practices. This bill seeks to establish a
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number of basic, common-sense consumer protections for vehicles
purchased or leased from BHPH dealers, including, importantly, a
30-day minimum warranty and restrictions on the use of GPS
technology to track a buyer's whereabouts and the use of
ignition shutdown technology to remotely disable the buyer's
vehicle.
Background on "Buy Here, Pay Here" business model . "Buy Here,
Pay Here" car dealers get their moniker from the common practice
in the field of requiring customers to return once or twice a
month to the dealership to make loan payments, usually in cash.
According to the author, the typical BHPH business model is to
stock and sell older, high-mileage vehicles to consumers who
cannot otherwise qualify for conventional auto loans. In a
conventional auto loan, traditional new and used car dealers
merely serve as the middleman where the purchase money is
provided by a bank or finance company. Unlike those dealers,
however, BHPH dealers do not assign sale and lease contracts
they generate to third party finance or lease sources. Because
they instead maintain and administer their own sales and lease
portfolios, they do not have to comply with underwriting and
loan policies set by traditional lenders, and thus are free to
set financial terms that are significantly higher than
conventional auto loans and leases. This can be aptly summed up
by a quote attributed to Ken Shilson, a founder of the National
Alliance of Buy Here Pay Here Dealers (NABD), a trade group:
"This is not the car business. This is the finance business."
("A vicious cycle in the used-car business", Los Angeles Times,
10/30/2011.)
According to the same Times article, whether it's cars or
finance, BHPH business is good. NABD's own figures indicate
profit margins among its members average nearly 40%-- twice what
new car dealers make. CNW Marketing Research estimates there
are over 33,000 BHPH lots nationwide that sold nearly 2.4
million cars last year, up from 1.3 million a decade ago.
Federal Deposit Insurance Corp. (FDIC) data indicates that BHPH
dealers make $80 billion in loans every year. (Los Angeles
Times, 10/30/2011.)
Definition of Buy Here, Pay Here dealers. As proposed to be
amended, this bill defines a buy here pay here dealer to mean a
seller who enters into conditional sale contracts or lease
contracts, and who does not routinely assign those contracts to
an unaffiliated third-party finance or leasing source.
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According to the author, this definition closely reflects the
federal definition of BHPH dealers recently enacted as part of
the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Public Law 111-203). The author may wish to consider the
benefit of referencing the federal statute to clearly
incorporate the new law as well as any regulations that may be
adopted in the future by the Consumer Financial Protection
Bureau (CPFB) to govern BHPH dealers.
This bill requires BHPH dealers to provide a basic minimum
warranty on all used cars. According to the author, there are
many reports of consumers who have purchased a car from a BHPH
dealer, often only because they have few other options to obtain
a much-needed car for work or family reasons, yet are faced with
a vehicle that has broken down shortly after the purchase with
no clear remedy for addressing the problem. For example, a
recent article describes the experience of one buyer who felt
compelled to buy a car from a BHPH dealer to prevent her from
being repeatedly late to her job caring for an elderly couple:
Told she'd be fired if it happened again, Twombly put
down $4,000 - all her savings - on a 9-year-old Chrysler
Sebring with 95,000 miles. The dealership lent her the
$2,600 balance at a steep 18% interest rate.
A few months later, the Sebring broke down and she got
into a dispute with the dealer over who should pay for
repairs. Twombly quit making loan payments, and Dig's
Wheels of Escondido, Calif., repossessed the car. She
again struggled to get to work on time and was fired.
That set off a chain of events that left the 38-year-old
single mother and her two children homeless for six
weeks. "I don't know what I'm going to do," said Twombly,
who is still out of work. "I lost my job because I lost
my car." ("A hard road for the poor in need of cars",
Los Angeles Times, 11/3/2011.)
As proposed to be amended, this bill requires BHPH dealers, with
every sale or lease of a used car, to provide a written minimum
warranty that is good for at least 30 days from the contract
date or until 1,000 miles have been driven, whichever happens
first. The bill provides that a BHPH dealer that fails to
provide the warranty shall be deemed to have provided the
warranty as a matter of law. The terms of the warranty require
the buy-here-pay-here dealer to repair the failure of any
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covered part, as specified, or at the election of the buyer or
lessee, provide reimbursement for the reasonable cost of
repairing the failure of the covered part. In cases where the
buyer timely notifies the dealer that the vehicle has violated
the terms of the warranty, the bill requires the BHPH dealer to
either repair the car to conform to the warranty, or cancel the
contract and make the buyer whole, as provided. The author
contends that these reasonable limited warranty requirements
will provide a baseline of protection for BHPH consumers who
simply want what they bargained for-a reliable mode of
transportation.
The National Independent Automobile Dealers Association (NIADA)
opposes the introduced version of this bill, which does not
contain a limited warranty requirement. It is not known what
position NIADA has with respect to the proposed amendment to
require a minimum warranty.
This bill prohibits the "Pay Here" requirement. If this bill is
chaptered into law, then the "buy-here pay-here" label may
become an obsolete description because the bill would no longer
allow these dealers to require the buyer to make payments to the
dealer in person. Consumer advocates contend that eliminating
this requirement will address the reported practice of
unannounced repossession of cars at the dealer's lot and the
unfortunate stranding of the buyer that may result. A recent
L.A. Times article describes the experience of one such buyer:
A year and a half later, Lee fell behind on her payments
and filed for bankruptcy. So she was relieved when the
dealership called and offered to make her loan more
affordable. The sales manager even promised to throw in a
free smog check. Lee drove back to Repossess Auto on a
rainy Monday evening, handed the keys to an attendant and
sat down with the manager.
Moments later, she said, employees parked four cars
tightly around the Ford, blocking it in. There would be
no new deal. Lee's car was being repossessed. She and her
children waited in the rain until a friend could drive
them home. ("A vicious cycle in the used-car business",
Los Angeles Times, 10/30/2011.)
In a time where virtually all consumer bills, including new car
payments, have long been made by putting a check in the mail or
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by electronic payment, it is hard to understand what useful
purpose an in-person payment requirement serves, particularly
when it exists in only one sector of the auto dealership
industry.
This bill restricts the use of electronic tracking and ignition
override technology in cars sold by BHPH dealers. According to
the author, BHPH dealers employ other questionable practices,
like the in-person payment requirement, that are designed
primarily to facilitate the fast and cost-effective repossession
of cars so they can quickly be resold again-a practice known as
"churning." This includes installation of electronic tracking
technology (i.e. GPS technology) in cars so they can easily be
located at any time, and installation of ignition override
technology that allows the dealer to remotely disable operation
of the vehicle so it can be towed or repossessed.
At the time of this analysis, the Committee had received an
"oppose unless amended" letter from the Payment Assurance
Technology Association (PATA), seeking amendments to conform the
bill with Penal Code Section 637.7(b) (authorizing use of
tracking technology when "the registered owner, lessor, or
lessee of a vehicle has consented to the use of the electronic
tracking device with respect to that vehicle.") After
discussions with PATA, the author has proposed to amend the bill
to require BHPH dealers to obtain the buyer's written consent
before equipping the car with such technologies, rather than
placing an outright ban on these devices. It is believed, but
not known for certain, that the proposed amendments are
sufficient to address PATA's concerns and remove their
opposition.
NIADA also opposes the introduced version of this bill that
prohibits the use of electronic tracking and ignition override
technology. NIADA contends that the use of such technology is a
widely accepted practice that "allows BHPH dealers to grant
consumer credit with more flexible contract terms and lower
down-payment requirements because the dealers have a greater
assurance that their collateral can be located in the event of
customer default." It is not known what position NIADA has on
the bill as proposed to be amended, which no longer prohibits
the use of the technology.
ARGUMENTS IN SUPPORT : Consumers for Auto Reliability and Safety
(CARS) and the Navy-Marine Corps Relief Society both contend
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that this bill would be particularly helpful to veterans and
active duty military families in California, who they contend
are often affected by predatory practices of used car dealers.
In support, the Navy-Marine Corps Relief Society explains:
Young military families are particularly vulnerable to
high cost lender and fast-talking car dealers who are
able to sell cars "as-is", with no warranty. Our
military clientele are frequently new consumers with
little credit history. Often spouses must make financial
decisions while the service member is deployed. High
interest loans and excessive car repairs can easily push
their finances to the edge and harm their financial
well-being.
ARGUMENTS IN OPPOSITION : This bill is strongly opposed by the
National Independent Automobile Dealers Association (NIADA), who
describes itself as a close industry associate of the National
Alliance of Buy Here Pay Here Dealers (NABD). NIADA contends
that this bill "will ultimately hurt the very consumers it seeks
to protect", stating:
New and used automotive dealerships are among the most
highly regulated businesses in our economy and contribute
significant revenues to state and federal treasuries
through the collection of sales tax and additional fees.
Any addition to existing oversight provided by (federal
agencies) and a myriad of state and local agencies would
be onerous for California's dealers who offer BHPH
financing. Passing AB 1447 will create a disincentive
for dealerships to continue in this business and make it
more difficult to provide reasonable automotive financing
for consumers who need reliable vehicles to get to their
jobs, schools, and doctor's appointments. It is
reasonable to think that with fewer BHPH options, these
consumers will seek other transportation solutions. The
most likely alternative would be to buy from unlicensed,
private sellers or curb stoners who have no incentive to
protect the consumer from an unsafe vehicle history,
branded titles, or odometer discrepancies.
Pending Related Legislation: AB 1534 (Wieckowski) seeks to
require that automobile dealers affix a label to every used car
for sale that states the reasonable market value of the vehicle,
as determined by a nationally recognized pricing guide. AB 1534
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is scheduled for hearing by the Assembly Judiciary Committee on
the same date as this bill.
SB 956 (Lieu) seeks to require "buy-here, pay-here" car dealers
to obtain a finance lender license and subject them to
regulation under the California Finance Lenders Law, among other
things. SB 956 is scheduled for hearing in Senate Judiciary on
April 24th.
REGISTERED SUPPORT / OPPOSITION :
Support
Center for Responsible Lending
Consumers for Auto Reliability and Safety (CARS)
Consumer Federation of California
Navy-Marine Corps Relief Society
Oppose (unless amended)
Payment Assurance Technology Association
Opposition
National Independent Automobile Dealers Association (NIADA)
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334