BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 265 (Holden)
Version: March 26, 2015
Hearing Date: June 16, 2015
Fiscal: Yes
Urgency: No
TH
SUBJECT
Consumer protection: buy-here-pay-here dealers
DESCRIPTION
Existing law prohibits a buy-here-pay-here dealer from locating
a vehicle with electronic tracking technology or disabling a
vehicle with starter interrupt technology unless, among other
things, the dealer provides a written disclosure to the buyer
stating that the dealer will provide a warning no less than 48
hours before the starter interrupt technology is used to shut
down the vehicle remotely. This bill would additionally require
the above disclosure to state that the dealer will provide a
warning 10 days before the use of the starter interrupt
technology and a final warning no less than 48 hours before the
use of the starter interrupt technology to shut down the vehicle
remotely.
BACKGROUND
Buy-here-pay-here (BHPH) dealers are automobile dealers that
generally handle financing for consumer auto loans internally,
not through the services of third party lenders. These dealers
typically have more flexibility to approve financing for
consumers with poor credit histories by accepting a borrower's
credit risk themselves instead of finding a willing outside
lender, and in some cases will approve an automobile loan
without checking a consumer's credit. Since BHPH dealers
self-finance their customer's vehicle purchases, they are
typically able to structure financing arrangements based on an
individual consumer's financial situation, including allowing
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for weekly payments for purchasers who receive a weekly
paycheck. However, because of the increased credit risk BHPH
dealers take on, their vehicles tend to be older than those sold
by other used vehicle dealers and the interest rates on their
loans tend to be higher than third-party financed automobile
loans.
BHPH dealers gained statewide attention after the Los Angeles
Times published a three-part series on these dealers in fall of
2011, which described the situation of several BHPH consumers,
including Tiffany Lee:
Tiffany Lee wanted a car. She was weary of the two-hour bus
ride to her job at a UCLA Health System clinic. She hated
having to ask friends to drive her 7-year-old son to his
asthma treatments. But as a single mother with three
children, bad credit and a $27,000-a-year salary, she couldn't
find a bank or dealership willing to give her a loan . . .
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 [percent], 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
[percent]. 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. For most of those
people, having a car is the only way to stay employed, and
they'll accept almost any terms to get one.
Buy Here Pay Here lots sold nearly 2.4 million cars nationwide
[in 2010], 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. Although dealers are loath to open
their books, profit margins average nearly 40 [percent],
according to a trade group, the National Alliance of Buy Here
Pay Here Dealers. That's twice what new-car dealers make.
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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 . . .
Default and repossession are so central to the business that
many dealers plan on both. They equip cars with hidden GPS
devices and remote-control ignition blockers to make the repo
man's work easier. (Ken Bensinger, A Vicious Cycle in the
Used-Car Business, Los Angeles Times (Oct. 30, 2011)
[as of June 5, 2015].)
The Legislature responded to concerns about the business
practices of BHPH dealers by, among other things, prohibiting
these dealers from tracking a vehicle after its sale using
electronic tracking technology or from disabling a vehicle with
starter interrupt technology unless certain disclosures are
provided to the vehicle's purchaser at the time of sale. This
bill would strengthen the existing disclosure by requiring the
disclosure to state that the dealer will provide a warning 10
days before the use of starter interrupt technology and a final
warning no less than 48 hours before using starter interrupt
technology to shut down the vehicle remotely.
CHANGES TO EXISTING LAW
Existing law , the Rees-Levering Act, sets forth 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. (Civ. Code Sec.
2982.)
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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. (Civ. Code Sec. 2982.2.)
Existing law defines a "buy-here-pay-here" dealer to mean a
dealer that does both of the following, except as specified:
enters into conditional sale contracts or lease contracts, as
specified; and
assigns less than 90 percent of all unrescinded conditional
sale contracts and lease contracts to unaffiliated third-party
finance or leasing sources within 45 days of the consummation
of those contracts. (Veh. Code Sec. 241.)
Existing law provides that after the sale of a vehicle, a
buy-here-pay-here dealer shall not do any of the following:
utilize electronic tracking technology to obtain or record the
location of the vehicle, unless the buyer is expressly made
aware of the existence and use of the tracking technology by
the buy-here-pay-here dealer, the buyer's written consent is
obtained, and either or both of the following apply:
o the electronic tracking technology is used solely to
verify and maintain the operational status of the tracking
technology, to repossess the vehicle, or to locate the
vehicle to service the loan or keep the loan current; or
o the electronic tracking technology is used solely for
any optional service to the buyer and both of the following
conditions are met:
§ the agreement to utilize electronic tracking
technology for the optional service is separate from the
purchase and sale agreement, is not a condition of the
purchase or sale agreement for the vehicle, and is
executed after the completion of the purchase or sale
agreement for the vehicle; and
§ the buyer is permitted to cancel the optional
service at any point in the future without affecting the
sale of the vehicle, and is informed of his or her
ability to do so. (Civ. Code Sec. 2983.37(a)(1).)
Existing law provides that after the sale of a vehicle, a
buy-here-pay-here dealer shall not disable the vehicle by using
starter interrupt technology, unless the buy-here-pay-here
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dealer complies with all of the following provisions:
notifies the buyer in writing at the time of the sale that the
vehicle is equipped with starter interrupt technology, which
the buy-here-pay-here dealer can use to shut down the vehicle
remotely;
the written disclosure provided to the buyer at the time of
sale informs the buyer that a warning will be provided no less
than 48 hours before the use of the starter interrupt
technology to shut down the vehicle remotely and discloses the
manner and method in which that warning will occur. The
dealer shall offer the buyer a choice of warning methods,
including warning from the device, telephone call, email, or
text message, if available, provided that the warning method
does not violate applicable state or federal law; and
in the event of an emergency, the buyer will be provided with
the ability to start a dealer-disabled vehicle for no less
than 24 hours after the vehicle's initial disablement. (Civ.
Code Sec. 2983.37(a)(2).)
Existing law states that a violation of these provisions is a
misdemeanor punishable by a fine not exceeding one thousand
dollars ($1,000). (Civ. Code Sec. 2983.37(c).)
This bill would provide that after the sale of a vehicle, a
buy-here-pay-here dealer shall not disable a vehicle by using
starter interrupt technology, unless, in addition to the above
requirements, the written disclosure provided to the buyer at
the time of sale informs the buyer that a warning will be
provided 10 days before the use of the starter interrupt
technology, and a final warning will be provided no less than 48
hours before the use of the starter interrupt technology to shut
down the vehicle remotely.
This bill would specify that each violation of the above
requirements is a misdemeanor punishable by a fine not exceeding
one thousand dollars ($1,000).
COMMENT
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1.Stated need for the bill
The author writes:
Assembly Bill 265 recognizes that for many of the working
class Californians forced to use buy-here-pay-here dealerships
because of their poor credit, a 48 hour notice is not
sufficient. Frequently, payments can be delayed because of
clerical errors or other factors wholly outside of the buyers
control . . . AB 265 provides more time for these working
class Californians, many who work more than one job, to
collect enough money to make the payment, keeping them in
their car, going to work and making their payments.
Additionally, law enforcement suggested that an ambiguity
regarding the fine authority in existing law hindered
deterrence of bad actor car dealers. AB 265 clarifies the law
to note that each violation subjects a dealership to a fine,
permitting multiple penalties to be alleged and providing
greater disincentive to car dealerships looking to avoid
complying with existing law.
2.Additional Notice Prior To Disabling Vehicles
This bill would require that owners of vehicles equipped with
starter interrupt technology who purchased their vehicles from
buy-here-pay-here (BHPH) dealers receive an additional warning
before their vehicle is remotely disabled. Under this bill,
these consumers would receive a first notice from their BHPH
dealer 10 days before the starter interrupt technology is used,
and another final notice at least 48 hours before the technology
is used and the vehicle is disabled. The addition of an initial
notice 10 days before a vehicle is remotely disabled recognizes
the fact that some consumers may not be able to resolve whatever
condition is prompting the disabling of their vehicle within 48
hours. If a clerical error is prompting the disabling, the
additional advance notice provided in this bill would give
consumers extra time to resolve the error. Similarly, if the
disabling is being prompted by a missed payment, the added
10-day notice gives consumers more time to obtain money to
become current on his or her account. Considering that the
remote disabling of a vehicle poses obvious safety risks for not
only the occupants of the car, but also for anyone who may be
relying on the car for transportation out of a remote area, this
additional 10-day notice should help consumers avoid the
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potentially dangerous consequences of having their vehicle
remotely disabled.
3.Amendments to Address Weekly Payers
The author has received comments from some stakeholders
suggesting that the bill's new 10-day advance notice provision
may permit multiple late payments to accrue in the case of
consumers who make weekly car payments. Accrual of multiple
late payments, particularly for consumers without recourse to
additional credit, could rapidly increase a consumer's debt and
make the eventual default on their automobile loan more likely.
In order to avoid that circumstance, the author offers the
following amendments which would, in the case of weekly payers,
provide that the first warning will be given five days before
starter interrupt technology is used. Additionally, the author
offers a technical amendment clarifying that consumers will be
given a written disclosure at the time of purchase indicating
that they will be provided with the ability to start a
dealer-disabled vehicle for no less than 24 hours after its
initial disablement, and an amendment to double the fine for
dealer non-compliance to $2,000 per violation.
Author's Amendments :
On page 6, lines 2 and 3, strike "10 days before the use of
the starter interrupt technology," and insert "5 days before
the use of the starter interrupt technology for all weekly
payment term contracts and 10 days before the use of starter
interrupt technology on all other contracts,"
On page 6, line 11, strike "In" and insert "The written
disclosure provided to the buyer at the time of sale informs
the buyer that in"
On page 6, line 21, strike "one thousand dollars ($1,000)."
and insert "two thousand dollars ($2,000)."
Support : California District Attorneys Association; Consumer
Attorneys of California; Consumer Federation of California;
County of Los Angeles; Silicon Valley Community Foundation
Opposition : None Known
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HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation :
SB 956 (Lieu, 2012) would have enacted the Buy-Here-Pay-Here
Automobile Dealers Act. This bill would have defined a
"buy-here-pay-here" dealer as a dealer who enters into
conditional sale contracts or lease contracts and assigns less
than 90 percent of all unrescinded contracts to an unaffiliated
third-party finance or leasing source, as specified. This bill
would have required those dealers to obtain a finance lender
license, would have subjected them to specified provisions of
the California Finance Lenders Law, and would have given the
Department of Corporations regulatory jurisdiction over the
lending and repossessing activities of buy-here-pay-here
automobile dealers. This bill would have governed the terms and
conditions of contracts entered into by a buy-here-pay-here
automobile dealer and the rights of the parties, including
requiring a notice to a buyer-borrower of specified rights under
the contract. This bill was vetoed by Governor Brown.
AB 1447 (Feuer, Ch. 740, Stats. 2012) established consumer
protections for vehicles bought or leased from buy-here-pay-here
dealers. Among other things, this bill requires
buy-here-pay-here dealers 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 requires the warranty to cover the
engine, transmission, drive axle, front and rear wheel drive
components, engine cooling system, brakes, front and rear
suspension systems, steering, seatbelts, inflatable restraint
systems, catalytic converter or other emissions components,
heater, seals and gaskets, electrical, electronic, and computer
components, alternator, generator, starter, and ignition system.
This bill prohibits buy-here-pay-here dealers from repossessing
a vehicle or charging a penalty following timely payment of a
deferred downpayment, and prohibits a buy-here-pay-here dealer
from, after the sale of the vehicle, tracking the vehicle using
electronic tracking technology or from disabling the vehicle
with starter interrupt technology, except as specified.
AB 1534 (Wieckowski, Ch. 741, Stats. 2012) requires
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buy-here-pay-here dealers to affix to and to prominently and
conspicuously display a label on any used vehicle offered for
retail sale that states the reasonable market value of the
vehicle, as well as specified information used to determine the
vehicle's reasonable market value and the date the value was
determined. This bill also requires buy-here-pay-here dealers
to provide to prospective buyers a copy of any information
obtained from a nationally recognized pricing guide that the
buy-here-pay-here dealer used to determine the reasonable market
value of the vehicle.
Prior Vote :
Assembly Floor (Ayes 77, Noes 0)
Assembly Appropriations Committee (Ayes 17, Noes 0)
Assembly Privacy and Consumer Protection Committee (Ayes 11,
Noes 0)
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