BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 1447 (Feuer)
As Amended June 25, 2012
Hearing Date: July 3, 2012
Fiscal: Yes
Urgency: No
BCP
SUBJECT
Automobile Sales Finance: Sellers
DESCRIPTION
This bill would prohibit a buy-here-pay-here (BHPH) dealer from
selling or leasing a used vehicle at retail price without giving
the buyer or lessee a written warranty that shall have 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. If the dealer fails to
give the buyer a written warranty, the dealer shall be deemed to
have provided the warranty as a matter of law.
This bill would additionally prohibit a BHPH dealer, after the
sale of a vehicle, from:
utilizing electronic tracking to obtain or record the
location of the vehicle, unless the buyer is expressly made
aware of the tracking device by the dealer, provides
written consent, and certain conditions are met; and
disabling the vehicle using starter interrupt technology,
unless the dealer complies with specified requirements.
This bill would also prohibit a BHPH dealer from requiring a
buyer to make payments, other than the down-payment, to the
seller in person.
BACKGROUND
Buy-here-pay-here (BHPH) automobile dealerships have gained
recent attention after the Los Angeles Times published a
three-part series on these dealers in Fall 2011, which described
(more)
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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�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. . . .
BHPH 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 BHPH.
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 BHPH, 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. (Bensinger, A vicious
cycle in the used-car business, Los Angeles Times (Oct. 30,
2011).)
This bill seeks to respond to concerns raised as a result of
that three-part series in the Los Angeles Times by requiring
BHPH dealers to provide a minimum warranty of 30 days or 1,000
miles, restrict the use of electronic tracking and the use of
technology to remotely disable the vehicle, and prohibit those
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dealers from requiring a buyer to make a payment in person.
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.)
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 federal regulation requires 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 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 C.F.R. 455.3.)
Existing federal regulation requires 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.)
Existing law 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. (Veh. Code Sec. 11713.21.)
This bill would prohibit a buy-here-pay-here (BHPH) dealer from
selling or leasing a used vehicle at retail price without giving
the buyer or lessee a written warranty that shall have 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
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the contract, whatever occurs first. If the dealer fails to
give the buyer a written warranty, the dealer shall be deemed to
have provided the warranty as a matter of law.
This bill would require the written warranty to provide the
following:
if the buyer or lessee notifies the BHPH dealer that the
vehicle does not conform to the warranty, the dealer must
either repair the vehicle, reimburse the reasonable cost of
repairs, or cancel the sale or lease contract and provide a
full refund, as specified; and
the BHPH dealer shall pay 100 percent of the cost of
labor and parts for any repairs pursuant to the warranty,
and may not charge the buyer or lessee for the cost of
repairs or inspection, as specified. Any person performing
repairs must comply with the requirements of an automotive
repair dealer, as specified.
This bill would allow a BHPH dealer to provide the buyer or
lessee a full refund, less a reasonable amount for any damage,
as specified, rather than performing a repair. If the sale or
lease is cancelled, the following will apply:
the dealer must provide written notice by personal
delivery or first class mail;
the buyer or lessee shall return the vehicle in
substantially the same condition;
the dealer shall provide the buyer or lessee with a
receipt stating: the date of return; vehicle identification
number; make, model, year of vehicle; odometer reading;
statement that the sale or lease has been cancelled; and
the amount of the refund;
the dealer shall not treat the return of the vehicle
pursuant to the contract cancellation provisions;
the buyer or lessee shall execute documents to transfer
any interest in the vehicle to the BHPH dealer, as
specified; and
the dealer shall refund all amounts paid under the sale
or lease agreement, less a reasonable amount for property
damage sustained after the sale or lease, no later than the
day after the day on which the buyer or lessee returns the
vehicle.
This bill would require the written warranty to cover 14 major
types of components, including, the engine, transmission, and
braking system. Any Used Car Buyer's Guide displayed on a
vehicle offered for sale or lease shall list each of those
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systems and components and specify that the dealer will pay 100
percent of the cost of parts and labor for repairs covered by
the warranty.
This bill would require the BHPH dealer to make the repair or
provide a refund notwithstanding the fact that the warranty
period has expired if the buyer or lessee notified the dealer of
the failure of the covered system or part within the warranty
period.
This bill would provide that the above warranty provisions do
not apply to any defect or nonconformity caused by the
unauthorized or unreasonable use of the vehicle following the
sale, or to any property damage not to the vehicle arising out
of the failure of a covered part.
This bill would provide that the BHPH dealer shall have the
burden of proof in any proceeding where the exclusion of
coverage or deduction is at issue, as specified.
This bill would further prohibit a BHPH dealer from selling or
leasing a vehicle unless it meets the equipment requirements of
the Vehicle Code.
This bill would provide that any agreement between a BHPH dealer
and a buyer or lessee that disclaims, limits, or waives any of
the above rights shall be void as contrary to public policy.
This bill would additionally prohibit a BHPH dealer, after the
sale of a vehicle, from:
utilizing electronic tracking to obtain or record the
location of the vehicle, unless the buyer is expressly made
aware of the tracking device by the dealer, provides
written consent, and either: (1) the location of the
vehicle is solely used 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 it current; or (2) tracking is used solely for any
optional service to the consumer, as specified; and
disabling the vehicle using starter interrupt
technology, unless the dealer complies with the following:
(1) notifies the buyer at the time of sale that the vehicle
is equipped with starter interrupt technology; (2) provides
written disclosure that a warning will be given no less
than 48 hours prior to the use of starter interrupt
technology; and (3) in the event of an emergency, a
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consumer will be provided with the ability to start a
dealer-disabled vehicle no less than 24 hours after the
vehicle's initial disablement.
This bill would prohibit a BHPH dealer from requiring a buyer to
make payment to the seller in person.
This bill would provide that violation of the above tracking,
disabling and payment provisions is a misdemeanor punishable by
a fine not exceeding $1,000.
This bill would define "buy-here-pay-here dealer" as a dealer
who:
enters into conditional sales or lease contracts, as
specified; and
assigns less than 90 percent of all unrescinded sale contracts
and lease contracts to unaffiliated third-party finance or
leasing sources within 60 days of consummation of those
contracts.
This bill would state that a BHPH dealer does not include a
lessor who primary leases vehicles that are two model years old
or newer, or, a dealer that certifies 100 percent of used
vehicle inventory and maintains an onsite service and repair
facility.
COMMENT
1. Stated need for the bill
According to the author:
Recent reports have brought to light a number of
questionable practices utilized by "buy-here-pay-here"
automobile dealers. Practices such as requiring a buyer to
make regular payments in person, tracking their whereabouts
using GPS technology, and utilizing ignition shutdown
technology to disable a person's vehicle, are practices that
simply cannot be ignored and must not be tolerated without
some basic requirements to ensure the protection of car
buyers.
Similarly - it is commonplace that cars purchased from
buy-here-pay-here dealers are high mileage vehicles sold at
high prices, with high interest rates and, all too
frequently, prove to be inadequate as a reliable mode of
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transportation. In looking into the issue of how consumers
fare with buy-here-pay-here dealers, we have heard many,
many stories of buyers who are faced with a car that has
broken down not long after the purchase and with no clear
remedy for addressing the problem - such as an express
warranty. California consumers deserve better. AB 1447 is
intended to provide California consumers with a baseline of
minimum but essential protections from a segment of the car
market that is in dire need of reform.
2. Protections
In response to concern about the practices of certain
buy-here-pay-here (BHPH) dealers, this bill would enact four
different protections for consumers who elect to buy or lease a
vehicle from one of those dealers. The need for those
protections was highlighted in the three-part series that was
published in fall of 2011 in the Los Angeles Times.
a. Base warranty
This bill would prohibit a BHPH dealer from selling or leasing
a vehicle without giving the buyer or lessee a written
warranty that has a minimum duration of at least 30 days or
1,000 miles. If a dealer failed to give the buyer a warranty,
this bill would deem the dealer to have provided the warranty
as a matter of law. Furthermore, the bill would require the
warranty to cover fourteen major types of components,
including the engine, braking system, and even the seals and
gaskets on covered components. Consumers for Auto Reliability
and Safety, in support, asserts:
This is a narrowly crafted provision that is aimed at
curbing abuses among BHPH dealers . . . �b]ecause the
dealers are in a far superior position to know the
history and condition of the car, compared with the
buyers, this requirement will help reduce the risk of
purchasing a vehicle the dealer knows is a ticking
automotive time bomb.
The Independent Automobile Dealers Association of California,
in opposition, asserts that the warranty poses several
problems, including that :
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1) �T]he dealer doesn't know in advance if he will
carry the paper or assign it to a sub-prime lender in
which there would be no warranty, and if he decided to
carry the paper, would he declare the warranty after
the sale?
2) �T]he warranty mandate would appear to violate
federal law that requires the posting of the Used Car
Buyers Guide on every car being offered for sale
notifying the customer that the car is being sold "As
Is" or "Warranty" - the warranty could put the �BHPH]
dealer at odds with the federal requirement.
Finally, the warranty would be expensive and added to the
price of the car thus hurting the consumers who can least
afford it.
The author, in response, argues: "�t]he minimum warranty
requirement is included in the bill specifically for the
purpose of ensuring that buyers are being sold a reliable
source of transportation. The BHPH industry has proven to be
extremely profitable. As reported in the L.A. Times - and
attributed to the National Alliance of Buy Here Pay Here
Dealers, the industry enjoys a 40�percent] profit margin -
about twice the rate of traditional dealers. To suggest that
a warranty of 30 days or 1,000 miles is going to somehow be
the factor that puts a BHPH car out of reach for a financially
struggling family is an argument that is both cynical and
absurd." The author further notes that "Six other states -
including New York - have adopted minimum warranties for used
cars (broader than this bill) - and there is no evidence the
market has suffered in those states. More than a half dozen
other states have prohibited 'As Is' sales."
Given the concerns raised about the quality of the vehicles
sold by certain BHPH dealers, from a policy standpoint, the
proposed warranty requirement would arguably require those
dealers to do their due diligence to ensure that the vehicles
they sell are actually mechanically sound (otherwise the
dealer would have to spend their profits fixing the defects in
an unsound vehicle). Although the cost of that warranty would
arguably be reflected in the price of the car, by requiring it
to be provided on all cars, this bill would arguably increase
the quality of vehicles sold, and, in turn, increase the
likelihood that purchasers will remain happy with their
purchase and continue making payments.
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b. Electronic tracking and starter interrupt technology
With respect to the use of electronic tracking devices and
starter interrupt technology, the Los Angeles' Times
three-part series reported:
Many dealers don't worry about buyers' credit scores --
knowing they can't be good -- but they almost always
insist on long lists of references so they can pressure
friends and family when a payment is missed.
They also frequently help customers apply for the earned
income tax credit for low-income workers -- and then
offer a loan against the anticipated refund to use as a
down payment. Dealers report a surge in sales in the
three months leading up to tax day. Stan Schwarz has
frequented Buy Here Pay Here lots for more than a decade,
selling "payment devices" such as GPS beacons that can be
concealed on cars. Schwarz recalled the first sale he
made to a Buy Here Pay Here dealer, in 1997. "He had a
loaded .45 on his desk, a trailer and six cars on a
gravel lot," he said.
Since then, Schwarz's company, PassTime of Littleton,
Colo., has sold more than 1 million GPS trackers and
remote-control ignition blockers to 3,500 lots. Over the
last two years, his company enjoyed a 40�percent]
increase in sales. (Bensinger, A vicious cycle in the
used-car business, Los Angeles Times (Oct. 30, 2011).)
To address concerns about the use of those technologies, this
bill would further prohibit a BHPH dealer, after the sale of a
vehicle, to utilize electronic tracking unless the buyer is
expressly made aware of the use of the tracking device, the
buyer has provided written consent, and the location of the
vehicle is only used for specified purposes or the technology
is used for an optional service to the consumer. Similarly,
this bill would prohibit the BHPH dealer from disabling the
vehicle using starter interrupt technology unless the dealer
notifies the buyer, in writing, at the time of sale about the
technology, provides a written disclosure that a warning will
be provided 48 hours before the technology remotely shuts down
the vehicle, and that the consumer can start a disabled
vehicle within 24 hours in an emergency situation.
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Considering that remote shutdown 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 desolate area, the proposed restriction on the use of
those devices appears appropriate. Furthermore, it appears
appropriate to ensure that an individual has to provide
written consent before they can be electronically tracked by a
BHPH dealer - that consent would make sure that the individual
is fully aware of the technology and, if he or she is
uncomfortable with the prospect of being tracked, that
individual can either negotiate the point or purchase a car
elsewhere.
c. No requirement for in-person payments
This bill would also prohibit a BHPH dealer from requiring a
buyer to make payments to the seller in person (aside from the
downpayment). That prohibition is based upon reports that the
dealers in question require purchasers to return several times
a month to make their loan payments. Regarding the experience
of consumers when returning to the dealership, the Los
Angeles' Times three-part series reported the following
encounter:
. . . Lee fell behind on her payments and filed for
bankruptcy. So she was relieved when the dealership
called and offered to make her loan more affordable. The
sales manager even promised to throw in a free smog
check. Lee, 35, drove back to Repossess Auto on a rainy
Monday evening, handed the keys to an attendant and sat
down with the manager.
Moments later, she said, employees parked four cars
tightly around the Ford, blocking it in. There would be
no new deal. Lee's car was being repossessed. She and her
children waited in the rain until a friend could drive
them home. (Bensinger, A vicious cycle in the used-car
business, Los Angeles Times (Oct. 30, 2011).)
Although customers could still elect to return to those
dealers and make payments in person (if the option is
available from the BHPH dealer), they could no longer be
required to do so. As a result, ironically, a
buy-here-pay-here dealer would no longer be able to require a
consumer to "pay here."
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3. Definition of buy-here-pay-here
It should be noted that this is one of three bills dealing with
BHPH dealers that is currently pending in the Legislature and
that all three authors are working together to formulate a
final, standard definition of "buy-here-pay-here" dealer. The
most recent version of that definition, amended into this bill
on June 25, 2012, defines those dealers as a seller who enters
into conditional sales contracts and assigns less than 90
percent of all unrescinded conditional sale contracts and lease
contracts to unaffiliated third-party finance or leasing sources
within 60 days of the consummation of those contracts.
Furthermore, the definition excludes sellers that certify 100
percent of their vehicles and maintain an on-site repair
facility.
Staff notes that to be consistent with the effort to have a
uniform definition, the final version of each bill should
reference a single definition, if possible, to provide for
consistency throughout statutes.
Support : Center for Responsible Lending; Consumers for Auto
Reliability and Safety; Consumer Federation of California;
Navy-Marine Corps Relief Society
Opposition : Independent Automobile Dealers Association of
California; National Independent Automobile Dealers Association
HISTORY
Source : Author
Related Pending Legislation :
SB 956 (Lieu) would enact the Buy-Here-Pay-Here Automobile
Dealers Act, as specified, to regulate contract terms and other
activities of entities meeting the definition of BHPH automobile
dealers. This bill is set for hearing on July 3, 2012 in the
Assembly Judiciary Committee.
AB 1534 (Wieckowski) would require 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. This bill
is set for hearing on July 3, 2012 in this Committee.
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Prior Legislation : None Known
Prior Vote :
Assembly Judiciary Committee (Ayes 8, Noes 2)
Assembly Appropriations Committee (Ayes 12, Noes 5)
Assembly Floor (Ayes 49, Noes 25)
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