BILL ANALYSIS                                                                                                                                                                                                    



                                                                  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