BILL ANALYSIS Ó
SB 956
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Date of Hearing: June 25, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
SB 956 (Lieu) - As Amended: May 21, 2012
SENATE VOTE : 24-12
SUBJECT : Buy-here-pay-here automobile sellers and lenders.
SUMMARY : Establishes the Buy-Here-Pay-Here (BHPH) Automobile
Dealers Act. Specifically, this bill :
1)Defines a BHPA dealer as a seller that does the following:
a) Enters into a conditional sale or lease contract;
b) Does not routinely assign conditional sale contacts or
lease contracts to an unaffiliated third-party finance or
leasing source; and,
c) Collects payments on or otherwise services conditional
sale contracts or lease contracts.
2)Requires BHPA dealers to be licensed under the California
Finance Lenders Law (CFLL).
3)Provides that an automobile dealer that meets the definition
of BHPH to become licensed under the CFLL within six months of
meeting the definition.
4)Limits the annual percentage rate (APR) of a BHPH loan to no
more than 17% plus the federal funds rate in effect at the
time the contract was executed.
5)Provides that a BHPH conditional sale contract shall include
the following notice in 8-point boldface type: "If you have a
complaint concerning this buy-here-pay-here automobile dealer
or the contract, you should try to resolve it with the dealer.
Complaints concerning unfair or deceptive practices or methods
by the dealer may be referred to the city attorney, the
district attorney, an investigator for the Department of Motor
Vehicles, or an investigator for the Department of
Corporations, or any combination thereof. After this contract
is signed, the dealer may not change the financing or payment
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terms unless you agree in writing to the change. You do not
have to agree to any change, and it is an unfair or deceptive
practice for the dealer to make a unilateral change. I have
read and understand the terms of this notice."
6)Prohibits a BHPH dealer from commencing repossession of a
vehicle due to the borrower's failure to make a scheduled
payment prior to the 11th day following the date on which that
payment was due.
7)Provides that if a BHPH borrower pays the delinquent amount in
full, the borrower shall be entitled to 45 days thereafter to
pay the BHPH dealer the amount of any delinquency charges,
penalty interest and fees arising out of the delinquency and
commencement of repossession proceedings.
8)Prohibits a BHPH from doing the following:
a) Repossessing a vehicle other than through engaging the
services of a licensed repossession agency; or,
b) Charging a buyer fees or charges in excess of $500
resulting from the commencement by the BHPH dealer of any
action to repossess the vehicle.
9)Specifies that a seller is not a BHPH automobile dealer if the
seller does both of the following:
a) Certifies 100% of seller's vehicles; and
b) 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 as certified
by the National Institute for Automotive Service
Excellence.
EXISTING LAW
1)Provides that under the Automobile Sales Finance Act (also known
as the Rees-Levering Motor Vehicle Sales and Finance Act), sets
forth various consumer protections relating to automobile
conditional sales contracts, including, among other things,
provisions relating to disclosure of fees, the terms of the
contract, and repossession. (Civ. Code Sec. 2981 et seq.)
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2)Provides for the CFLL, administered by the Department of
Corporations (DOC), which authorizes the licensure of finance
lenders, who may make secured and unsecured consumer and
commercial loans (Financial Code Sections 22000 et seq.). The
following are the key rules applied to consumer loans made
pursuant to the CFLL:
a) CFLL licensees who make consumer loans under $2,500 are
capped at interest rates which range from 12% to 30% per year,
depending on the unpaid balance of the loan (Sections 22303 and
22304). Administrative fees are capped at the lesser of 5% of
the principal amount of the loan or $50. An administrative fee
of $75 may be charged for loans of $2,500 or more (Section
22305);
b) In addition to the requirements in "a" above, CFLL licensees
who make consumer loans under $5,000 are prohibited from
imposing compound interest or charges (Section 22309); are
limited in the amount of delinquency fees they may impose
(Section 22320.5; delinquency fees are capped at a maximum of
$10 on loans 10 days or more delinquent and $15 on loans 15
days or more delinquent); are required to prominently display
their schedule of charges to borrowers (Section 22325); are
prohibited from splitting loans with other licensees (Section
22327); are prohibited from requiring real property collateral
(Section 22330), and are limited to a maximum loan term of 60
months plus 15 days (Section 22334);
c) In addition to the requirements in "a" and "b" above, CFLL
licensees who make consumer loans under $10,000 are limited in
their ability to conduct other business activities on the
premises where they make loans (Section 22154); must require
loan payments to be paid in equal, periodic installments
(Section 22307); and must meet certain standards before they
may sell various types of insurance to the borrower (Sections
22313 and 22314); and,
d) Generally speaking, the terms of loans of $10,000 or above
are not restricted under the CFLL.
3)Authorizes the licensure of finance brokers under the CFLL, and
defines a finance broker as any person who is engaged in the
business of negotiating or performing any act as a broker in
connection with loans made by a finance lender (Section 22004).
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4)Imposes a 36% APR on consumer credit extended to members of
the military and their dependents. (10 USC Sec. 987.)
FISCAL EFFECT : According to Senate Appropriations Committee
Analysis all costs offset by license and assessment fees in the
CFLL.
COMMENTS :
Need for the bill:
According to information provided by the author's office, the
following expresses the need for SB 956:
Buy Here, Pay Here used car dealers are a largely
unregulated industry within the used car industry that has
taken advantage of a gap in regulations to prey on
vulnerable populations. These abuses were documented in a
fall 2011 investigative series by The Los Angeles Times
that exposed the suspect business practices of these
below-the-radar dealerships.
Buy Here, Pay here dealers differ from more traditional car
sellers in that the dealers 'hold' the car loans, instead
of selling/assigning it off to a third-party lender, such
as a bank or finance company. This is often unknown by the
car buyer.
The interest on loans associated with Buy Here, Pay Here
dealerships is several times higher than the market rate
for used car loans, and the dealers charge up to three
times the Bluebook value of the vehicle. Many of the loans
require customers to make substantial down payments and
physically return to the dealership to make twice-monthly
payments.
These dealers finance the sales of these usually road-worn
vehicles at interest rates that forces customers to default
at a 25-percent rate. When the customer defaults, the
dealer repossesses the car and resells it to another
customer - thus gaining yet another down payment and yet
another predatory loan. Some vehicles have been sold,
repossessed and re-sold as many as eight times, according
to The Times.
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There are a number of intriguing facts that speak to the
questionable practices of BHPH dealerships:
Buy Here, Pay Here dealerships sold 2.4
million automobiles in 2010, up from 1.3 million in
2000.
Market research estimates there are up to
33,000 such lots nationwide, compared to 22,000 new
car dealerships.
Buy Here, Pay here dealerships make about
$80 billion in loans annually, according to the
Federal Insurance Deposit Corp.
Profit margins average about 40%, which
doubles what new car dealerships typically earn
according to a trade group, the National Alliance of
Buy Here, Pay Here Dealers.
Interest rates for loans from the
dealerships can top 30%. Average rates at other
used-car dealers for customers with good credit
range from 5 to 8%, according to HSH Associates.
About one in four buyers at Buy Here, Pay
Here dealerships default.
Current law states that used car dealers offering BHPH loans are
exempt from the laws associated with finance lenders and the
protections applied for consumers. The Rees-Levering Automobile
and Sales Act does apply to BHPH dealers yet these regulations
treat all car dealers the same regardless if the dealer acts
like a financial institution. Consequently, the consumers of
BHPH dealers are suffering due to the lack of regulations that
would otherwise protect them from dubious business practices.
SB 956 seeks to create consumer protections from the financial
practices of BHPH dealers and to limit this business model that
ratchets up profits by exploiting customers.
SB 956 has three major goals:
1. Impose first-ever regulations on used-car dealers offering
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BHPH loans by requiring them to obtain a California Finance
Lender's license, which would provide customers with an
array of protections. These protections include
disclosures on the consumer's rights, interest rates and
investigation agencies, as well as, prohibitions on false,
misleading or deceptive statements and advertisements by
dealers.
2. Limit BHPH used-car installment loans and leases to a
maximum 17.25% APR, which would give California the
strongest interest cap in the nation. Specifically, SB 956
limits the interest rate to 17% plus the federal funds
rate. This would allow for fluctuations in the market to
reasonably move the interest rate cap.
3. Change the way BHPH dealers are able to repossess vehicles
to include a 10-day grace period, consumer protections
typically offered by most car dealers. It would also make
it easier for buyers to reinstate a repossessed car.
Background:
BHPH dealerships differ from traditional auto finance, in that
BHPH auto sales are constructed as installment plans, similar to
rent-to-own stores, allowing dealers to establish their own
standards and interest rates. In a traditional auto finance
transaction, the purchase money is provided by a third party
lender not affiliated with the dealer. The dealer gets the
purchase money for the car, and the borrower is then responsible
to the lender for maintaining the loan. Loans under this common
scenario are regulated under various federal laws including the
Truth in Lending Act, Consumer Leasing Act, Equal Credit
Opportunity Act and the Fair Credit Reporting Act. Again, BHPH
transactions are structured as installment contracts, thus
falling outside the scope of federal and state laws that govern
loan transactions.
According to Forbes, Subprime Auto Loans Grow as Lenders Charge
a Premium, subprime auto finance is growing business as
investors purchased $5.8 billion in asset backed securities
(ABS) during the first quarter of 2012. Subprime loans
accounted for 23% of new car loans, and 57% of used car loans in
the first quarter of 2012. These numbers several percentage
points from the same time last year. "Deep subprime" borrowers
(those with scores below 550) paid an average 17.9% APR. In
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2011, BHPH loans accounted for around 20% of the used auto
loans.
BHPH automobile dealerships gained 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%, 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%. 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
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.
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?
Aimee and Chris Cvitanov wound up on a Buy Here Pay Here lot
after financial setbacks dented their credit rating.
Chris, 37, was severely burned in a car accident six years ago
and hasn't worked regularly since. Aimee, 30, lost her job in
the insurance industry in late 2009. The lease on their
Chrysler 300 expired soon afterward, and she needed a car
quickly to search for work.
More than a dozen conventional dealerships turned the couple
down for a loan. Then they heard an ad on the radio for M.K.
Auto Inc. near their suburban Sacramento home.
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%. 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%, according to the new contract.
Their payments climbed to $498, stretched out into 2014.
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By then, the total cost of the Mercedes with interest would be
more than $25,000.
?.
Bor Pha bought a 2004 Honda Odyssey with 70,000 miles from
Yia's Auto Sales in Sacramento, a Buy Here Pay Here dealership
that caters to the Central Valley's Hmong community.
The price was $13,000. The contract, handwritten in English,
said she'd pay 12% interest on the loan. Pha said she trusted
the dealer because he was a fellow Hmong and had sold her two
cars in the past.
Late last year, she tried trading in the van at a different
lot. The salesman looked at her contract with Yia's and
determined that her monthly payment of $326.43 reflected a
20.3% interest rate, not the much-lower listed rate. The
higher rate would cost Pha an additional $3,200 over the
five-year term of the loan. (A vicious cycle in the used-car
business, Los Angeles Times (Oct. 30, 2011).)
The Los Angeles series on BHPH also exposed that the high
interest rates are not the only drain on the resources of
customers. Typically, the cars purchased are high mileage,
increasing the likelihood of expensive repairs on the part of
the driver, adding to the overall costs of the vehicle. Not
only are interest rates high on automobiles near the end of
their life span, but the purchase price (on which the
installment contract is based) is usually inflated far beyond
its Blue Book value. In one case highlighted in the Times
series one customer with a four year loan at 22% APR will end up
paying four times the Blue Book value. These costs do not take
into account the repairs that would be necessary for an older
car over a 4 year period.
In further proof that Wall Street and private equity have an
appetite for almost anything, subprime auto loans are packaged
into securities and sold into secondary markets. Private equity
firms have invested millions of dollars in BHPH lots. The
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attraction to these investors is the average profit on each car
of 38%. In one part of the BHPH series featured in the Los
Angeles, Investors place big Bets on Buy Here Pay Here Used-Car
Dealers, provides this ironic background on the securitization
of BHPH loans:
Although they're backed mainly by installment contracts
signed by people who can't even qualify for a credit card,
most of these bonds have been rated investment grade. Many
have received the highest rating: AAA.
In conclusion, in considering the extent and solution to this
problem one must consider that the interest charges are not the
only consumer costs associated with these transactions. The Los
Angeles Times series has exposed that frequently these cars
start off the transaction marked-up well beyond Blue Book value,
sometimes double or triple the value. Additionally, consumers
that qualify for a BHPH loan are not given a loan amount for
which they qualify and then shop around the car lot. Instead
they appear to be steered to a particular automobile for which
they qualify; a practice and idea far removed from a typical
used or new car sale. Thus the interest rate is not the only
borrower costs in these transactions. They are paying far above
market rates for older used cars that will need costly
maintenance and repairs, while paying interest rates exceeding
20%.
Key components:
In the simplest terms SB 956 does the following:
1)Requires BHPH dealers to be licensed under the CFLL.
2)Provides that the interest rate on a BHPH transaction shall
not exceed 17% plus the federal funds rate.
3)Requires a borrower/buyer notice that outlines the borrower's
rights and responsibilities.
4)Mandates the BHPH dealers use third party repossession
agencies and that the charges resulting from a repossession
shall not exceed $500.
Arguments in support:
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The following are a sample of arguments in support:
National Consumer Law Center writes,
Buy here pay here (BHPH) car dealerships target the most
vulnerable consumers, those who believe, accurately or not,
that they are not qualified to obtain financing elsewhere.
The BHPH model includes the selling of older cares, often
in poor condition, at high prices with financing at very
high interest rates. These terms are in lieu of serious
and effective underwriting to determine ability to repay
the loan. The deals are structured so as to provide a high
profit margin even at a high default rate. This
expectation of high default rates become a self-fulfilling
prophecy as consumers must make very high payments for cars
that often in poor or dangerous condition. The BHPH
business model, through repossessing and reselling the same
cars over and over again, is built to profit off the
failure of loans to perform. Repossession leaves consumers
without working cars needed for jobs, child care, and other
essentials. Having lost the assets they used to buy the
BHPH car, they are often unable to afford to buy replace
vehicles.
California Reinvestment Coalition writes:
Low-income consumers rely on their vehicles to drive to
work, and without a car, many low-income individuals are
put at risk of losing their jobs, or leaving their children
at home for longer hours because of their longer commute
times. During these sluggish economic times, when
low-income communities and communities of color are faced
with disproportionate numbers of foreclosures and job
losses, their vehicles are often the last asset that they
have to their names. By overpricing these vehicles and
using aggressive repossession techniques, this final asset
is being pulled out from underneath the feet of the most
vulnerable Californians.
Center for Responsible Lending writes:
As hard-working Californians continue to struggle with
their finances in a tough economy, it is important that we
protect families from abusive lending practices which can
endanger their ability to keep their car, and therefore put
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them at risk of losing their job. SB 956 would address
some of the abuses inherent in the "Buy Here Pay Here"
model by requiring a 10-day grace period before a dealer
can repossess a vehicle, limiting fees charged in
connection with a repossession, capping interest rates and
requiring licensing (and thus oversight) of "Buy Here Pay
Here" dealers by the Department of Corporations.
Arguments in opposition :
The following is a sample of arguments in opposition:
National Independent Automobile Dealers Association writes:
Limiting interest rates buy-here-pay-here lenders can
charge at the fed-rate plus seventeen percent will cause
those who provide this highly specialized financial service
to deep sub-prime auto buyers to discontinue in the line of
businesses, which will in turn cause a dramatic decrease in
sales tax revenues for the state, county and municipal
budgets. According to the California Board of
Equalization, used car sales generated nearly $468 million
in sales tax in calendar 2011. Initial projections upon
this bill's passage show a drop of sales tax revenue
between $234 million and $337 million. This will cause
catastrophic ripples that will be felt by consumers,
businesses and state, county and local governments who
depend on sales tax revenues to provide basic constituent
services.
If the goal of this legislation is consumer protection,
singling out and requiring only one segment of retailers in
the auto industry to cap their interest rates while
allowing others to charge rates substantially higher than
the proposed rate cap in SB 956 is an unnecessary handicap
on their businesses. This proposed rate cap will not
prevent those who are not defined as buy-here, pay here
dealers to continue arranging financing and booking car
loans for consumers through subprime lenders that will
charge interest rates in excel of twenty-one percent and
much higher. For example, CapitalOne Auto Finance
perpetually books sub-prime and deep sub-prime auto loans
on used vehicles sold "AS-IS" through franchise dealers at
rates in excess of twenty one percent interest.
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Amendments:
Page 4, lines 24-27 contains language that specifies that
notwithstanding section 22250 of the Financial Code, that a BHPH
contract shall comply with the sections referenced in section
22250. Section 22250 is the provision of the CFLL that exempts
transactions of $10,000 or more from certain requirements, and
transactions of $5000 or more from other requirements. The
language on page 4, lines 24-27 is intended to say that in spite
of this limitation in the CFL, that these provisions would apply
to BHPH contacts. In order for this to be clear, staff
recommends the following amendment.
1) Notwithstanding Section 22250 of the Financial Code, a
conditional sale contract or a lease contract entered into
by a buy-here-pay-here automobile dealer shall be subject
to sections 22154, 22155, 22307, 22313, 22314, 22315,
22752, 22201, 22202, 22300, 22305, 22306, 22307(a), 22309,
22320.5, 22322, 22323, 22325, 22326, 22327, 22400, and
22751 to the provisions referenced in Section 22250 of the
Financial Code.
Related Pending Legislation :
AB 1447 (Feuer) would prohibit a person selling or leasing a
motor vehicle under a conditional sale contract to require a
buyer to make payments, other than the down payment, in person
and would require the seller to display the vehicle's sale price
on the vehicle. The bill would also prohibit the seller from
calling a buyer's references after the sale of the vehicle and
would prohibit a seller from tracking the vehicle using Global
Positioning System (GPS) technology and from disabling the
vehicle with ignition override technology. (Senate Judiciary)
AB 1534 (Wieckowski) would require a used car dealer to affix a
label on a vehicle that states the reasonable market value of
the vehicle and other specified information. The bill would also
require the dealer to give a prospective purchaser any
information obtained from a nationally recognized pricing guide
that the dealer used to determine the reasonable market value of
the vehicle. This bill is currently set for hearing in the
Assembly Judiciary Committee on April 24, 2012. (Senate
Judiciary)
REGISTERED SUPPORT / OPPOSITION :
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Support
American Federation of State, County and Municipal Employees
(AFSCME)
California Immigrant Policy Center
California Reinvestment Coalition (CRC)
Center for Responsible Lending (CRL)
Consumer Attorneys of California
Consumer Federation of California
Consumers for Auto Reliability and Safety
El Segundo Chamber of Commerce's Government & Military Affairs
(GMA)
LAX Coastal Area Chamber of Commerce
National Consumer Law Center
Silicon Valley Community Foundation
Torrance Area Chamber of Commerce
Opposition
Antelope Valley Board of Trade
Antelope Valley Chamber of Commerce
Antelope Valley Hispanic Chamber of Commerce
Coalition to Protect our Freedom to Drive
D&H Motors
Independent Automobile Dealers Association of California
Independent Automobile Dealers Association of California
Leedom Group
National Alliance of Buy Here, Pay Here Dealers (NABD)
National Independent Automobile Dealers Association
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081