BILL ANALYSIS Ó
SB 956
Page 1
Date of Hearing: July 3, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 956 (Lieu) - As Amended: June 19, 2012
As Proposed to Be Amended
SENATE VOTE : 24-12
SUBJECT : BUY-HERE-PAY-HERE AUTOMOBILE SELLERS AND LENDERS
KEY ISSUE : SHOULD BUY-HERE-PAY-HERE AUTOMOBILE DEALERS BE
REGULATED UNDER CALIFORNIA'S FINANCE LENDING LAW TO BETTER
PROTECT CONSUMERS FROM QUESTIONABLE INDUSTRY LENDING PRACTICES?
FISCAL EFFECT : As currently in print this bill is keyed
non-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, require greater consumer protections for the
predominantly low-income car-buyers who appear to be most
frequently victimized by these practices.
This bill seeks greater regulation of BHPH dealers by requiring
them to obtain a finance lender license from the Department of
Corporations, subjecting them to existing consumer protections
under the existing California Finance Lender's Law. The bill
also would cap the interest rates they charge to consumers, as
specified, at a rate of 17.25% APR under current parameters.
Finally the bill would establish new rules for repossession of
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automobiles, including prohibiting repossession until a 10-day
grace period has elapsed after a missed payment. The bill is
supported by numerous consumer advocates and some local chambers
of commerce, while it is strongly opposed by BHPH dealers and
other local chambers of commerce. Generally, opponents contend
that this bill will create a disincentive for BHPH dealerships
to remain in business, and thus will make it more difficult for
credit-challenged consumers who need reliable vehicles to obtain
automotive financing for the purchase of a car.
SUMMARY : Requires buy-here-pay-here automobile dealers, as
defined, to be licensed under the California Finance Lenders
Law, and establishes additional restrictions upon lending and
repossession practices of those dealers. Specifically, this
bill :
1)Defines a "buy-here-pay-here" automobile dealer as a seller
that does all of 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)Exempts from the above definition a seller who does both of
the following:
a) Certifies 100 percent of the seller's vehicles pursuant
to the used vehicle certification program described in
Section 11713.18 of the Vehicle Code.
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.
3)Requires BHPH dealers to be licensed under the California
Finance Lenders Law (CFLL) no later than six months from the
date on which it meets the definition of a BHPH dealer.
4)Provides that the Department of Corporations shall have
regulatory jurisdiction, limited to lending and repossessing
activities, over BHPH dealers pursuant to this act and the
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CFLL.
5)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 for the vehicle was executed.
6)Provides that a BHPH conditional sale contract shall include a
specified notice, that among other things, informs the buyer
that after the contract is signed, the dealer may not
unilaterally change the financing or payment terms unless the
buyer agrees in writing to the change, and that complaints of
unfair practices may be directed to appropriate authorities,
as specified.
7)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.
8)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.
9)Prohibits a BHPH from physically repossessing a vehicle other
than through engaging the services of a licensed repossession
agency, and from charging the buyer more than $500 in fees for
any action commenced by the BHPH dealer to repossess the
vehicle.
EXISTING LAW :
1)Pursuant to the Rees-Levering Act, requires certain
disclosures in a conditional sale contract for the sale of a
motor vehicle, including specified 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.
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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)Pursuant to the California Finance Lenders Law (CFLL), authorizes
the licensure of finance lenders by the Department of Corporations
and authorizes lenders to make secured and unsecured consumer and
commercial loans. (Financial Code Section 22000 et seq.)
4)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 (Financial Code
Section 22004).
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, require greater consumer protections for
the predominantly low-income car-buyers who appear to be most
frequently victimized by these practices. This bill seeks
greater regulation of BHPH dealers by requiring them to obtain a
finance lender license from the Department of Corporations, cap
the interest rates they charge to consumers, as specified, and
follow new rules for repossession of automobiles.
Author's Statement: According to the author:
BHPH used-car dealers prey on desperate workers and
low-income families by financing overpriced cars at
ransom-level interest rates. They do this by targeting
people who need cars to get to work and manage the
daily necessities of life, but cannot qualify for
conventional car loans. These dealers markup aging,
auction-bought cars more than 200 percent, charge
30-percent-and-higher interest rates, and aggressively
push customers to default on their loans. The result:
About a fourth of these cars are quickly repossessed,
allowing the dealers to keep the down payment, plus any
cash installments that have been made. This bill seeks
to create consumer protections from the financial
practices of BHPH sealers and to limit this business
model that ratchets up profits by exploiting customers.
Background on "Buy Here, Pay Here" business model . "Buy Here,
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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. (Id.)
Definition of Buy Here, Pay Here dealers. Under this bill, a
BHPH dealer is defined to mean a seller who: (1) enters into
conditional sale contracts or lease contracts; (2) does not
routinely assign those contracts to an unaffiliated third-party
finance or leasing source; and (3) collects payments on or
otherwise services conditional sale contracts or lease
contracts. According to the author, this definition is largely
based on (but does not mirror) 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). In
addition, the bill exempts sellers from this definition if the
seller both certifies all of its used vehicles pursuant to an
existing certification program (Vehicle Code Section 11713.18)
and maintains an on-site service and repair facility, as
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specified. As currently in print, this bill's definition
differs from the definition of "BHPH dealer" in two other bills
(AB 1447 (Feuer) and AB 1534 (Wieckowski)) currently under
consideration by the Legislature. The Committee may wish to
consider the benefit of adopting a definition of "BHPH dealer"
that is consistent across all three bills, should any or all of
them reach the governor's desk.
Licensing of BHPH dealers under the CFLL increases departmental
oversight and protects consumers. According to the author,
BHPH dealers form a "largely unregulated industry that has taken
advantage of a gap in regulations to prey on vulnerable
populations." Although BHPH dealers are covered under the
Rees-Levering Automobile Sales Act and the Vehicle Leasing Act,
they are exempt from lending laws because they make and service
their own loans, rather than selling them to licensed financial
institutions as most auto dealers already do. The California
Finance Lenders Law subjects licensees to strong disclosure
requirements and prohibitions on false and deceptive statements,
among other things. This bill seeks to close this loophole in
the law that allows BHPH dealers to be exempt from these basic
consumer protections simply because they make and service their
own loans. Specifically, this bill would require a BHPH dealer
to obtain a finance lender's license, pursuant to the CFLL, no
later than six months from the date on which it meets the
definition of a BHPH dealer. The bill also clarifies that the
Department of Corporations (DOC) has regulatory jurisdiction,
limited to lending and repossessing activities, over BHPH
dealers pursuant to this act and the CFLL.
Opponents of the bill, representing or affiliated with the BHPH
industry, contend that this licensing requirement would force
many honest BHPH dealers out of business because they could not
qualify for the additional $25,000 bond that is required for
licensure by the DOC, in addition to the $50,000 bond that is
already required by the DMV for auto dealers. The Independent
Automobile Dealers of Association of California (IADAC) states:
"Dealers are not lenders, they are sellers of used cars on
credit, and therefore they should not be required to be licensed
by the Department of Corporations." In response, the author
contends that if BHPH dealers are acting like financial
institutions, then they should be regulated like financial
institutions by the DOC in order to ensure consumers are
adequately protected.
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Interest rates for BHPH dealers capped at a current level of
approximately 17%. According to the author, the high interest
rates that BHPH dealers typically charge are a big reason why
about one in four buyers of a vehicle from a BHPH dealer ends up
defaulting on the loan. The author also notes that while
average interest rates at other used-car dealers for customers
with good credit range from 5 to 8 percent, interest rates for
loans from BHPH dealers can often top 30 percent. This bill
seeks to limit the interest rate on BHPH loans in California to
the federal funds rate in effect at the time of the contract,
plus an additional 17 percent. Because the current federal rate
is 0.25%, if implemented today this bill would cap the interest
rate at 17.25% APR, which according to the author, would still
give California the strongest interest cap in the nation, while
at the same time allowing for fluctuations in the market to
reasonably shift the interest cap.
BHPH dealers and their associates oppose the interest cap in
this bill, contending that a cap would be a disincentive for
dealers to continue in the BHPH business, and would limit access
to vehicles for consumers who patronize BHPH dealers because
they cannot otherwise secure credit to purchase a car.
According to the National Alliance of Buy Here, Pay Here Dealers
(NABD): "Generally accepted interest rates from around the
country of 25% to 30% offer legitimate finance companies the
flexibility to absorb these higher losses that traditional
financiers will not tolerate." Opponents also contend that
credit-challenged customers of BHPH dealers simply have not
earned a rate of 17%, and that its dealers would have to raise
the price of the car or increase the down payment to adjust to
such a cap, further limiting access to these consumers.
Additional restrictions on repossession practices. Under this
bill, if a buyer-borrower fails to make a scheduled payment, the
BHPH dealer must honor a 10-day grace period before taking steps
to repossess the vehicle. According to the author, this
sensible protection is already offered by many car dealers, but
does not appear to be the practice among BHPH dealers as
documented in a series of recent news articles. In addition,
the bill also contains provisions intended to slow down the
repossession process and make it easier for a borrower to
reinstate a repossessed car while keeping fees down. Under this
bill, if the buyer-borrower pays the delinquent amount in full,
he or she would be entitled for 45 days thereafter to pay the
dealer the amount of any delinquency charges, penalty interest,
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and fees arising out of the delinquency and commencement of
repossession proceedings. The bill also prohibits a BHPH dealer
from charging a buyer-borrower a fee or charge for repossession
that exceeds $500 and would require the dealer to use a licensed
repossession company to repossess the vehicle.
This bill addresses problems reported by servicemembers.
Proponents contend that military service members are often
affected by predatory practices of used car dealers. In 2005,
John Irons, the director of the Navy-Marine Corps Relief
Society, testified to the Assembly Banking Committee that his
informal survey of Navy lawyers found that "the number one issue
they are confronted with is used car dealers who are taking
advantage of military personnel," with excessively high interest
rate loans just one of the problems cited. Supporters state
that this bill would be particularly helpful to veterans and
active duty military families in California.
Author's technical amendment: This bill currently requires that
a conditional sale contract or lease contract entered into by a
BHPH dealer "shall be subject to the provisions referenced in
Section 22250 of the Financial Code." As part of the CFLL,
Section 22250 exempts transactions of $10,000 or more from
certain requirements, and transactions of $5000 or more from
other requirements. That section, however, contains references
to over 20 other sections of the Financial Code. In order to
provide more specificity and clarity, the author proposes to
amend the bill to enumerate those sections, as follows:
On page 5, lines 5-6, strike "the provisions referenced in
Section 22250" and insert "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"
Related Pending Legislation : AB 1447 (Feuer) would require a
BHPH dealer to issue a 30-day or 1,000-mile warranty to the
buyer or lessee of a used vehicle bought or leased at retail
price, and would require the warranty to cover specified items.
Among other things, the bill would also prohibit the dealer from
requiring a buyer to make payments in person, and would prohibit
a seller from tracking the vehicle using GPS technology and from
disabling the vehicle with ignition override technology. AB
1534 (Wieckowski) would require a used car dealer to affix a
label on a vehicle that states the reasonable market value of
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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. Both AB 1447 and AB 1534 are currently set for
hearing in the Senate Judiciary Committee on July 3, 2012.
REGISTERED SUPPORT / OPPOSITION :
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 (IADAC)
Leedom Group
National Alliance of Buy Here, Pay Here Dealers (NABD)
National Independent Automobile Dealers Association (NIADA)
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334