BILL ANALYSIS Ó AB 265 Page 1 Date of Hearing: April 7, 2015 ASSEMBLY COMMITTEE ON PRIVACY AND CONSUMER PROTECTION Gatto, Chair AB 265 (Holden) - As Amended March 26, 2015 SUBJECT: Consumer protection: buy-here-pay-here dealers SUMMARY: Requires a buy-here-pay-here automobile dealer to provide ten days' notice to a consumer before using starter interrupt technology to disable an automobile after the consumer defaults on a finance payment. Specifically, this bill: 1)Requires a buy-here-pay-here (BHPH) automobile dealer to provide a written disclosure to the buyer at time of sale that a warning will be provided ten days before the use of starter interrupt technology to disable the automobile in the event of a default. 2)Clarifies that the violation of BHPH dealer consumer notice requirements may be cumulative, with each such violation being a misdemeanor punishable by a fine not exceeding one thousand dollars ($1000). 3)Declares that no reimbursement is required pursuant to the California Constitution because the only costs that may be incurred by a local agency or school district will be incurred because this act creates a new crime or infraction, eliminates a crime or infraction, changes the penalty for a crime or infraction, or changes the definition of a crime. AB 265 Page 2 EXISTING LAW: 1)Sets forth in the Rees-Levering Act requirements with regard to disclosures required 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 (CC) 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. (CC 2982.2) 3)Requires a car dealer selling a used vehicle for a purchase price under $40,000 to offer the buyer a two-day contract cancellation option agreement, priced as specified, and under which the buyer may return the vehicle without cause so long as certain conditions are met. (Vehicle Code (VC) Section 11713.21) 4)Defines a "buy-here-pay-here" car dealer as one that enters into conditional sale or lease contracts and assigns less than 90% of such contracts to unaffiliated third party finance or leasing sources within 45 days of consummation. (VC 241) 5)Requires, pursuant to federal regulation, a car dealer, before offering a used vehicle for sale to a consumer, to display a window sticker called the "Buyer's Guide" that must, among other things, disclose whether any warranty is offered and the AB 265 Page 3 basic terms of any warranty. 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 Code of Federal Regulations (C.F.R.) 455.3) 6)Requires, pursuant to federal regulation, used car dealers, at the time of sale, to give the buyer the original Buyers Guide displayed on the vehicle or an accurate copy that contains all of the required disclosures and reflects the final warranty terms agreed on between the buyer and seller. (16 C.F.R. 455.3) FISCAL EFFECT: Unknown COMMENTS: 1)Purpose of this bill . AB 265 is intended to provide consumers who purchase automobiles from BHPH dealers with an additional measure protection by requiring the dealer to provide a ten-day notice to the consumer (in addition to the two-day notice required under existing law) before it can disable the car remotely with a starter interrupt device after a missed loan payment. This bill is author-sponsored. 2)Author's statement . According to the author, "[d]espite efforts in recent years to crack down on abusive loan practices by buy-here-pay-here car dealerships, many continue to take advantage of car buyers with poor credit. Current industry practices of giving 48 hours to make a payment is still shorter and significantly less forgiving than lending practices imposed on those with good credit. This practice by the buy-here-pay-here dealerships results in a nearly 18% of buyers being at least one-day delinquent on their loans. For the working class car buyers forced to rely on buy-here-pay-here car dealerships, two days is frequently insufficient time to determine why a payment is late, if any errors occurred in processing the payment and how much is past AB 265 Page 4 due while simultaneously juggling a job and other familial responsibilities." 3)'Buy-here-pay-here' car dealerships . State law essentially defines a BHPH car dealer as one that sells or leases an automobile to a consumer, but maintains most of the financing interest rather than assigning it to a bank or other lender. Put another way, the BHPH dealer and lender are simply the same entity - loan payments are made to the same entity that sold the car. In practice, BHPH arrangements are considered more financially risky, and are aimed at individuals with poor or no credit histories or those with a low credit score who would otherwise have difficulty getting financing for a car, and who pay higher interest rates to the BHPH dealer as a result. BHPH customers are also often required to make loan repayments on a bi-monthly or even weekly basis. 4)News coverage of the BHPH industry. In October 2011, the Los Angeles Times published a series of articles on the BHPH industry. Among other things, that series found that interest rates on BHPH loans could be quite high, with some topping 30%. In contrast, average interest rates at other used-car dealerships for customers with good credit ranged from 5 to 8%. BHPH dealerships were said to make about $80 billion in loans annually, and sold 2.4 million cars nationally through approximately 33,000 dealerships. The LA Times article also found that about one in four customers of BHPH dealerships default. Because of the risk of default, repossession is common, so common in fact that some dealers equip cars with GPS (Global Positioning System) devices to track their locations and remote-control ignition blockers, which allow the dealer to remotely disable a car when a payment hasn't been made. It should be noted that consumers AB 265 Page 5 generally consent to the use of such devices as a precondition to the sale. If and when the car is repossessed, it is usually sold again to a new buyer. For example, the Los Angeles Times used DMV records to show that, for example, Repossess Auto in Hawthorne, California and a sister lot had sold more than 130 vehicles at least three times between July 2008 and October 2011. More recently, a September 2014 story from the New York Times reported that high-risk subprime auto loans are in high demand, even with interest rates on some loans exceeding 29%. The use of GPS and starter-interrupt devices has also grown, with two million vehicles equipped with such devices. However, consumers also report a number of problems with such devices: cars can be disabled after an owner falls only a couple of days behind in payments, leaving some individuals stranded away from home or in a potentially dangerous situation. Moreover, the GPS capability theoretically allows lenders to track the movement and activities of the owner. The devices also emit a warning sound when shut down is pending, which some borrowers see as more degrading than helpful. Nevertheless, such devices are viewed as effective - one device maker cited in the New York Times article said that its interrupt technology reduced late payments for customers from nearly 29% to roughly 7%. 5)Existing consumer protections . Under current law, a BHPH dealer that wishes to use starter interrupt technology on a car must notify the buyer in writing at the time of sale, and provide a separate notice to the consumer at least 48 hours before the technology would be used. Buyers must also be provided with the ability to restart a disabled vehicle for at least 24 hours in the event of an emergency. A violation of AB 265 Page 6 these and other protections is a misdemeanor punishable by a fine of up to $1000. 6)Arguments in support . According to the Consumer Attorneys of California, "Car buyers at buy-here-pay-here auto dealerships currently have fewer protections than buyers at traditional car dealerships? The buy-here-pay-here industry's statistics show that although 18% of buyers make late payments, only 4% of those buyers make payments more than 30 days late. Traditional car dealerships obtain loans through large banks. Buyers are given some leeway should the miss a payment as banks frequently take weeks longer to take actions on past due payments. Over 14% of buy-here-pay-here buyers can have their cars disabled despite being able to make their payments within the time frames required by traditional financing operations? This bill will provide greater consumer protections by enhancing the notice required before a buy-here-pay-here dealership can disable a vehicle for failure to timely pay loan payments. " 7)Previous legislation . AB 2503 (Hagman), Chapter 390, Statutes of 2014, added, among other things, BHPH dealers to the list of financial institutions that are subject to a misdemeanor for knowingly engaging an unlicensed person to repossess collateral on its behalf, and also specified that DMV may take disciplinary action against a BHPH dealer who hires an unlicensed repossessor. AB 1447 (Feuer), Chapter 740, Statutes of 2012, prohibited a BHPB dealer from selling or leasing a used vehicle at retail price without giving the buyer or lessee a written warranty with a minimum duration of at least 30 days from the date of delivery or when the odometer has registered 1,000 miles from what is shown on the contract, whatever occurs first. AB 1447 also prohibited a BHPH dealer from (1) utilizing electronic tracking to obtain or record the location of the vehicle after sale, unless the buyer is expressly made aware of the tracking device by the dealer, provides written consent, and certain AB 265 Page 7 conditions are met, and (2) disabling the vehicle using starter interrupt technology, unless the dealer complies with specified requirements. AB 1534 (Wieckowski), Chapter 741, Statutes of 2012, required a BHPH dealer to affix a label on any used vehicle being offered for retail sale that states the reasonable market value of that vehicle. SB 956 (Lieu) of 2012 would have enacted the Buy-Here-Pay-Here Automobile Dealers Act to regulate contract terms and other activities of entities meeting the definition of BHPH automobile dealers. The bill was vetoed by Governor Brown. REGISTERED SUPPORT / OPPOSITION: Support California District Attorneys Association Consumer Attorneys of California Consumer Federation of California Payment Assurance Technology Association Opposition None received. Analysis Prepared by: Hank Dempsey/P. & C.P./(916) 319-2200 AB 265 Page 8