BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 1534 (Wieckowski)
As Amended June 25, 2012
Hearing Date: July 3, 2012
Fiscal: Yes
Urgency: No
BCP
SUBJECT
Used Vehicle Sales: Labeling Requirements
DESCRIPTION
This bill would require a buy-here-pay-here dealer to affix a
label on any used vehicle being offered for retail sale that
states the reasonable market value of that vehicle.
BACKGROUND
Buy-here-pay-here (BHPH) automobile dealerships have gained
recent attention after the Los Angeles Times published a
three-part series on these dealers in Fall 2011, which described
the situation of Tiffany Lee:
Another buyer might have balked at the deal she was offered.
Lee figured she had no choice. She put $3,000 down and drove
off in a 2007 Ford Fusion, agreeing to pay $387 a month for
four years. The interest rate: 20.7 Ýpercent], nearly triple
the national average for a used-car loan. . . . In this
little-known but fast-growing corner of the auto market,
dealers command premium prices for road-worn vehicles and
finance the sales at interest rates that can top 30 Ýpercent].
In a kind of financial alchemy, they have found a way to turn
clunkers into cash cows and make money off the least
creditworthy customers: the millions of Americans who are
stuck in low-paying jobs, saddled with debt and unable to
qualify for conventional auto loans. . . .
Buy Here Pay Here lots sold nearly 2.4 million cars nationwide
last year, up from 1.3 million a decade ago, according to CNW
(more)
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Marketing Research. CNW estimates that there are more than
33,000 such lots nationwide, compared with about 20,000
dealerships selling new cars. Buy Here Pay Here dealers make
$80 billion in loans every year, according to the Federal
Deposit Insurance Corp. . . . Many of the lots require
customers to return once or twice a month to make loan
payments in cash - hence the term Buy Here Pay Here.
A key reason for the industry's growth in tough times is that
dealers can come out ahead whether or not customers keep up
with their loan payments. About 1 in 4 buyers default. In
the real estate and credit card industries, that would be bad
news. In the world of Buy Here Pay Here, it's just another
avenue for profit: The car can be repossessed and put back on
the lot for sale in short order. A new buyer makes a down
payment, takes on a high-interest loan and the cycle starts
anew. Provided they don't get wrecked, these recycled
vehicles just keep paying dividends. At some dealerships,
cars have been sold and resold over and over -- three, four,
even eight times apiece, motor vehicle records show.
(Bensinger, A vicious cycle in the used-car business, Los
Angeles Times (Oct. 30, 2011).)
In response to reports that some BHPH dealers are selling cars
for as much as double market value, this bill would require
those dealers to affix a label to any used vehicle that states
the reasonable market value of that vehicle.
CHANGES TO EXISTING LAW
Existing law 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. A dealer is prohibited from adding
charges to the contract without full disclosure and consent of
the purchaser. (Civ. Code Sec. 2982.2.)
Existing federal regulation requires used car dealers, before
offering a used vehicle for sale to a consumer, to display a
window sticker called the "Buyer's Guide" that must make several
disclosures, including, among other things:
a list of the fourteen major systems of an automobile and
defects that can occur in these systems;
a suggestion that consumers ask the dealer if a pre-purchase
inspection is permitted; and
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a warning against reliance on spoken promises that are not
confirmed in writing. (16 C.F.R. 455.2.)
Existing federal regulation requires the "Buyer's Guide" to
disclose whether any warranty is offered and the basic terms of
any warranty, and if no express warranty is provided, then the
Buyer's 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. (16 C.F.R. 455.2.) Existing federal regulation further
requires the dealer, at the time of sale, to give the buyer the
original Buyer's Guide displayed on the vehicle or an accurate
copy that in either case contains all of the required
disclosures and reflects the final warranty terms agreed on
between the buyer and seller. (16 C.F.R. 455.3.)
Existing federal law requires manufacturers of new automobiles,
prior to the delivery of any new automobile to any dealer, to
securely affix to the vehicle a label that discloses specified
information, including the following:
the retail price of such automobile suggested by the
manufacturer (MSRP);
the retail-delivered price suggested by the manufacturer for
each accessory or item of optional equipment, physically
attached to such automobile at the time of its delivery to
such dealer, which is not already included within the MSRP
stated; and
the amount charged, if any, to such dealer for the
transportation of such automobile to the location at which it
is delivered to such dealer. (15 U.S.C. Sec. 1232.)
This bill would require a buy-here-pay-here (BHPH) dealer to
affix a label on any used vehicle being offered for retail sale
that states the reasonable market value of that vehicle. That
label must meet the following conditions:
be in writing;
be printed with a heading that reads "REASONABLE MARKET VALUE
OF THIS VEHICLE" in at least 16-point type and text in at
least 12-point type;
be located adjacent to the window sticker identifying the
equipment provided with the vehicle or, if none, it shall be
located prominently and conspicuously on the vehicle so that
it is readily readable;
contain the information used to determine the reasonable
market value of the vehicle, including, but not limited to,
the use of a nationally recognized pricing guide for used
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vehicles;
contain the date the reasonable market value was determined;
and
indicate that the reasonable market value is being provided
only for comparison shopping and is not the retail sale price
or the advertised price of the vehicle.
This bill would require a BHPH dealer to provide a prospective
buyer with a copy of any information obtained from a nationally
recognized pricing guide that the dealer used to determine the
reasonable market value.
This bill would define "reasonable market value" as the average
retail value of a used vehicle based on the condition, mileage,
year, make, and model of the vehicle, as determined within the
last 60 days by a nationally recognized pricing guide, as
specified.
This bill would define "nationally recognized pricing guide" as
including, but not limited to, the Kelley Blue Book (KBB),
Edmunds, the Black Book, or the National Automobile Dealers'
Association (NADA) Guide.
This bill would define "buy-here-pay-here dealer" as a seller
who:
enters into conditional sales or lease contracts, as
specified; and
assigns less than 90 percent of all unrescinded sale contracts
and lease contracts to unaffiliated third-party finance or
leasing sources within 60 days of consummation of those
contracts.
This bill would provide that notwithstanding the above
definition, a seller is not a BHPH dealer if the seller does
both of the following:
certifies 100 percent of its vehicles, as specified; and
maintains an on-site service and repair facility that is
licensed by the Bureau of Automotive Repair and employs a
minimum of five master automobile technicians who are
certified by the National Institute for Automotive Service
Excellence.
COMMENT
1. Stated need for the bill
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According to the author:
"Buy Here, Pay Here" lots comprise a growing segment of the
used car industry, specializing in high interest vehicle
loans for people with poor credit. These dealers prey on
vulnerable customers by charging exorbitant interest rates
on overpriced, high mileage cars. They combine abusive and
predatory lending and pricing practices with harsh default
terms and swift repossession practices. In today's economy
millions of Americans find themselves in desperate need of a
car simply to keep their job. With the combination of
overpriced vehicles and unregulated interest rates,
customers can end up paying up to 10 times the fair market
value of the cars - if they are even able to continue making
payments before the car dies.
Consumers for Auto Reliability and Safety, in support,
contends that:
ÝAB 1534] will provide crucial information in a timely
fashion, where it is likely to be useful - on the vehicle
itself. Such pricing has been required on new cars since
the 1950's, in the form of the Monroney sticker, and has
improved transparency in the sales of new cars.
2. Reasonable market value
This bill would require buy-here-pay-here dealers to affix a
label on any used vehicle being offered for retail sale that
states the reasonable market value of the vehicle. That label
would be required to be placed adjacent to any window sticker
and contain, among other things, information used to determine
the reasonable market value. That value would be defined as the
average retail value based on condition, mileage, year, make,
and model of the vehicle, as determined within the last 60 days
by a nationally recognized pricing guide (including, but not
limited to, the Kelley Blue Book, Edmunds, the Black Book, or
the National Automobile Dealer's Association Guide).
With respect to the need for the proposed disclosure, the author
asserts that "Ýw]hile many consumers are savvy and come to the
lot after doing research, many do not . . . because they lack
internet access, speak limited English, are brand new to the
car-buying marketplace, or are just uncertain of where to find
the informationÝ; AB 1534] protects vulnerable consumers who are
the most at-risk of overpaying by requiring that cars at 'Buy
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Here, Pay Here' (BHPH) dealers declare the fair market value of
a vehicle." Staff further notes that the above-mentioned Los
Angeles Times series on BHPH dealers also found examples of
inflated sales prices, including the following details about
Aimee and Chris Cvitanov:
The Cvitanovs said a salesman collected information to check
their credit and told them the only car they qualified for
was a 2003 Mitsubishi Galant. It had been driven more than
100,000 miles.
The price was $7,999, according to their sales contract --
double the Kelley Blue Book value at the time. The couple
said they could manage a $1,000 down payment, and the dealer
offered to finance the rest at 25.99 Ýpercent]. Their
monthly payment would be nearly $290. The Cvitanovs said
they signed the contract, reluctantly, after the dealer
promised they could trade it in for something better if they
kept up their payments for six months.
When the time came, they exchanged the Mitsubishi for a
decade-old Mercedes-Benz E-Class with 80,000 miles, three
previous owners and a repossession in its past. At $13,998,
the price was about $5,500 above Blue Book. The balance of
the old loan was rolled into a new one, also with an
interest rate of 25.99 Ýpercent], according to the new
contract. Their payments climbed to $498, stretched out
into 2014. By then, the total cost of the Mercedes with
interest would be more than $25,000. (Bensinger, A vicious
cycle in the used-car business, Los Angeles Times (Oct. 30,
2011).)
Although disclosure of fair market value appears appropriate
given the documented examples of dealers substantially
overcharging for some cars, it is essential that the value
displayed accurately reflects the condition of the vehicle. For
example, since the determination of fair market value pursuant
to a nationally recognized pricing guide (such as Kelley Blue
Book) requires the dealer to make certain affirmations as to the
quality of the car, such as the quality - Excellent, Very Good,
Good, Fair, or Poor - it is essential for the dealer to be
truthful in those affirmations. If a dealer were to falsely
claim that a car were in better condition than it actually was,
the resulting fair market value displayed on the window could be
used to justify an inflated price. In response to that issue,
the author's office notes that interested parties believe that
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either dealers would not inflate the price because they would be
jeopardizing their name and respect, or alternatively, that even
if such an inflation occurs, consumers will be in a better place
than they are currently.
3. Definition of buy-here-pay-here
It should be noted that this is one of three bills (see AB 1447
(Feuer, 2012) and SB 956 (Lieu, 2012)) dealing with BHPH dealers
that is currently pending in the Legislature and that all three
authors are working together to formulate a final, standard
definition of "buy-here-pay-here dealer." The most recent
version of that definition, amended into this bill on June 25,
2012, defines those dealers as a seller who enters into
conditional sales contracts and assigns less than 90 percent of
all unrescinded conditional sale contracts and lease contracts
to unaffiliated third-party finance or leasing sources within 60
days of the consummation of those contracts. Furthermore, the
definition excludes sellers that certify 100 percent of their
vehicles and maintain an on-site repair facility.
Staff notes that, to be consistent with the effort to have a
uniform definition, the final version of each bill should
reference a single definition, if possible, to provide for the
consistency throughout statutes.
4. Opposition's concerns
The Independent Automobile Dealers Association of California, in
opposition, argues that: "Ýa]uto valuations are estimates based
on statistical information obtained from a variety of sources.
It needs to be pointed out that each valuation provider
disclaims its information as being an estimate or guide only.
To mandate placement of a valuation in a car only serves to
mislead the consumer. It says that the State of California has
determined that the most important thing you need to know is the
retail value. Factors that should first be considered that are
never part of the valuation process are maintenance, title
history, actual mechanical and overall condition based on an
inspection by a professional." The author, in response,
contends that:
ÝFair market value (FMV)] is an objective measure, despite
minor variation between valuation services. Major valuation
services (like ÝKelley Blue Book]) account for mileage,
condition, all trim options, and even zip code of the car.
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Providing buyers with a general starting point for
negotiations, even if it is not exact, will be beneficial
and will limit racial profiling of dealers setting an
arbitrary price. A dealer has an exact dollar value to
every aspect of the car, but they don't want to share that
information with the buyer. It is our belief that simply
supplying that information to the consumer will allow for a
more even, transparent negotiation.
The California Chamber of Commerce, in opposition, expresses
similar concerns, asserts that the labeling requirement is a
burden for vehicle dealers, and contends that "Ýa]ppraisals
could reasonably vary outside the range set by a national
pricing guide, but still accurately reflect the value of the
vehicle, yet AB 1534 would subject a dealer to liability
regardless."
Tricolor Auto Group, in opposition, expresses further concern
that: (1) the bill was initially drafted to apply to all
dealers selling used cars but amended to only include
buy-here-pay-here dealers, thus, giving independent deals a
competitive advantage; and (2) buy-here-pay-here dealers "will
now be motivated to sell lower quality cars so that they can
achieve a more favorable cost basis relative to the declared
FMV." In response, proponents assert that consumers are
currently paying more than the car is worth, so the prices they
are charged are higher than they would be if dealers were more
transparent and reflected the value more closely.
Support : Center for Responsible Lending; Consumer Action;
Consumer Federation of California; Consumers for Auto
Reliability and Safety; Silicon Valley Community Foundation
Opposition : California Chamber of Commerce; Independent
Automobile Dealers Association of California; Tricolor Auto
Group
HISTORY
Source : Author
Related Pending Legislation :
AB 1447 (Feuer, 2012) establishes consumer protections for
vehicles bought or leased from buy-here-pay-here dealers. This
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bill is set for hearing in this Committee on July 3, 2012
SB 956 (Lieu, 2012) would enact the Buy-Here-Pay-Here Automobile
Dealers Act, as specified, to regulate contract terms and other
activities of entities meeting the definition of buy here pay
here automobile dealers. This bill is set for hearing on July
3, 2012 in the Assembly Judiciary Committee.
Prior Legislation : None Known
Prior Vote :
Assembly Judiciary Committee (Ayes 6, Noes 3)
Assembly Appropriations Committee (Ayes 12, Noes 5)
Assembly Floor (Ayes 42, Noes 32)
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