BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 956 (Lieu) Hearing Date: April 18, 2012
As Amended: April 9, 2012
Fiscal: Yes
Urgency: No
SUMMARY Would enact the Buy-Here-Pay-Here Automobile Dealers
Act, as specified, to regulate the contract terms and other
activities of entities meeting the definition of buy here pay
here automobile dealers.
DESCRIPTION
1. Would define "dealer of vehicles" by reference to the
Vehicle Code, "conditional sales contract" and "lease
contract" by reference to the Civil Code, and "licensed
repossession agency" by reference to the Business and
Professions Code.
2. Would require every dealer of vehicles that enters into one
or more conditional sales contracts or lease contracts to
perform a calculation on or before January 31, 2013, and
annually thereafter. This calculation would require dealers
to calculate the percentage of conditional sales contracts
and lease contracts they entered into during the preceding
calendar year, which they assigned or sold to an
unaffiliated third party within 30 days of consummating the
contract.
3. Would define any dealer of vehicles which assigns fewer
than 90% of their conditional sales contracts and lease
contracts to unaffiliated third parties within 30 days of
consummating those contracts as a "buy-here-pay-here
automobile dealer," (BHPH dealer) and would require that
dealer to obtain a California Finance Lenders Law license
within six months of meeting the definition of a BHPH
dealer.
4. Notwithstanding the bill's requirement that BHPH dealers
obtain California Finance Lenders law licenses, would exempt
SB 956 (Lieu), Page 2
BHPH dealers from specified sections of that law, as
follows:
a. The allowable interest rate that could be charged by
a BHPH dealer to a buyer-borrower would be capped at an
annual percentage rate equal the federal funds rate in
effect at the time the contract was executed, plus an
additional 17% (currently 17.25%). Thus, the rate caps
in the CFLL would not apply to BHPH dealers.
b. BHPH dealers would be exempt from CFLL provisions
regarding fees that may be charged for dishonored checks
(Financial Code Section 22320), allowable delinquency
fees (Section 22320.5), and prohibitions against taking a
deed of trust, mortgage or lien upon real property as
security for a loan (Section 22330).
5. Would define a buyer-borrower as a person who enters into a
conditional sales contract or lease contract with a
buy-here-pay-here automobile dealer.
6. Would require all BHPH contracts to include specified
language instructing buyer-borrowers about some of their
rights related to the financing and payment terms of their
contracts, and instructing them on where they may file
complaints regarding BHPH dealers.
7. Would prohibit BHPH dealers from commencing repossession of
a vehicle until the 11th day following the date on which
payment is due.
8. Would provide that, if a buyer-borrower pays the delinquent
amount in full, following the commencement of repossession
proceedings by a BHPH dealer, that buyer-borrower would have
45 days thereafter to pay the amount of any delinquency
charges, penalty interest, and fees arising out of the
delinquency and commencement of repossession proceedings.
9. Would prohibit a BHPH dealer from physically repossessing a
vehicle, other than through the services of a licensed
repossession agency, or from charging a buyer-borrower more
than $500 in repossession fees or charges.
10. Would provide that any additional costs to the Department
of Corporations (DOC) resulting from its administration of
the bill should be borne by BHPH dealers through fees
SB 956 (Lieu), Page 3
charged by DOC to offset its reasonable regulatory costs to
administer the bill, as specified.
EXISTING LAW
11. Provides for the California Finance Lenders Law (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
(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);
d. Generally speaking, the terms of consumer loans of
$10,000 or above are not restricted under the CFLL. However,
all consumer loans made under the CFLL are subject to the
following requirements:
SB 956 (Lieu), Page 4
i. The amount of the loan, loan length, and the
costs, fees, and rates of charge must be fully and
clearly disclosed (Sections 22163, 22164, and 22332);
ii. False, deceptive, or misleading advertising
is prohibited (Section 22161).
12. Requires all CFLL licensees to obtain and maintain a surety
bond in a minimum amount of twenty-five thousand dollars
($25,000; Financial Code Section 22112), maintain a minimum
net worth of $25,000; Financial Code Section 22104), and
file an annual report with the commissioner of DOC,
providing information that the commissioner reasonably
requires concerning the business and operations of the
licensee within the state during the preceding calendar year
(Financial Code Section 22159).
13. Provides for the Automobile Sales Finance Act (Civil Code
Section 2981) and the Vehicle Leasing Act (Civil Code
Section 2985.7), which govern the terms of conditional sales
contracts and lease contracts that are the subject of this
bill. Generally speaking, both acts require the clear
disclosure of all fees and charges imposed on a vehicle
purchaser or lessor, govern the terms of conditional sales
and lease contracts, regulate the manner in which vehicles
subject to these contracts may be repossessed following a
purchaser's or lessor's inability to pay, and authorize
purchasers and lessors to bring actions against dealers for
violations of these acts, as specified.
COMMENTS
1. Purpose: SB 956 will regulate BHPH dealers by requiring
them to obtain CFLL licenses, capping the interest rate that
may be charged by these dealers, and changing their
repossession practices to require additional consumer
protections. According to the author, "BHPH 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 mark up 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
SB 956 (Lieu), Page 5
dealers to keep the down payment, plus any cash installments
that have been made."
2. Background and Discussion: SB 956 is based on a three-part
investigative series by Ken Bensinger, which appeared in the
Los Angeles Times in October, 2011. According to that
series, BHPH dealers differ from more traditional automobile
sellers in that the BHPH dealers make and service the loans;
most traditional automobile sellers make the loans, then
sell them to a depository institution or other licensed
finance company.
According to the Los Angeles Times series, interest rates on
BHPH loans can top 30%. In contrast, average interest rates
at other used-car dealerships for customers with good credit
range from 5 to 8%. BHPH dealerships make about $80 billion
in loans annually, and sold 2.4 million cars nationally,
through approximately 33,000 dealerships. About one in four
customers of BHPH dealerships default. Default and
repossession are so common that some dealers equip cars with
GPS devices to track their locations, and with
remote-control ignition blockers to ease repossession. Once
the cars are repossessed, they can be sold again, to new
buyers with poor credit, who are desperate for
transportation. Repeated sales of the same vehicle are
reportedly common. Using Department of Motor Vehicles
records, the Times found that Repossess Auto in Hawthorn, CA
and a sister lot have sold more than 130 vehicles at least
three times each since July 2008.
Representatives of the BHPH industry counter these claims by
pointing out that they offer a valuable service - giving
people with bad credit access to transportation so they can
provide for their families. BHPH dealers interviewed by Mr.
Bensinger explained that the risks inherent in their
business are high. When a buyer defaults, the car must be
repossessed (if it can be found), and then restored to
saleable condition (if it hasn't been so beaten up that it
must be junked). Dealers must also give customers an
opportunity to redeem their vehicles, before the cars can be
resold.
As reported by the LA Times, BHPH dealers can fall through the
regulatory cracks, because they are exempt from lending
laws, but they make and service their loans. At present,
car dealers are subject to the provisions of the Automobile
SB 956 (Lieu), Page 6
Sales Finance Act (Civil Code 2981 et seq) and the Vehicle
Leasing Act (Civil Code 2985.7), but are not regulated as
lenders. This bill's author is seeking to require them to
obtain CFLL licenses, to ensure that consumers who purchase
cars from BHPH dealers are eligible for greater protections
than those available under the Civil Code alone.
3. Will this bill achieve the author's intent? Members of the
opposition (see below) assert that no BHPH dealer will lease
a car off its lot at a 17.25% APR. That interest rate, they
argue, is too low to cover their costs of lending to the
high risk population that frequents BHPH dealers. If the
opposition's arguments are correct, and this bill has the
effect of putting BHPH dealers out of business or causing
them to stop lending to high risk borrowers, one must
reasonably assume that the buyer-borrowers this bill seeks
to help will look elsewhere to obtain their vehicles.
If we assume that this population of buyer-borrowers lacks the
creditworthiness needed to obtain auto loans from more
traditional, lower interest rate sources of financing, such
as banks and credit unions, we must also assume that this
population will seek out loans from the sources available to
them. These alternate sources are likely to be CFLL
licensees (who, as noted above, are not subject to interest
rate caps when they lend $2,500 or more), car dealerships
that do not meet the BHPH definition and are thus exempt
from this bill, or the issuers of high interest rate credit
cards. If this bill becomes law, will the buyer-borrowers
this bill seeks to help simply find other high interest rate
lenders from which to borrow the money to purchase their
vehicles?
4. Could this bill's definition of a BHPH dealer be manipulated
by dealers wishing to avoid regulation under the CFLL? As
described above, this bill defines BHPH dealers as those
which assign fewer than 90% of the conditional sales
contracts and lease contracts into which they enter to an
unaffiliated party (i.e., to dealers which service 10% or
more of the conditional sales and lease contracts into which
they enter). Could a dealer that realizes it is inching
dangerously close to the 10% threshold as the calendar year
comes to a close enter into a few extra, assignable
contracts before the close of the calendar year, in order to
avoid CFLL regulation?
SB 956 (Lieu), Page 7
5. Summary of Arguments in Support:
a. The Consumer Attorneys of California (CAOC) supports
SB 956, on the basis that the bill protects low-income
and vulnerable consumers from predatory used auto sales
practices. Current law largely ignores BHPH used car
dealerships, allowing them to prey on vulnerable
consumers who cannot otherwise afford a car. BHPH
dealers are among the most profitable and most rapidly
expanding type of auto dealership in the country.
CAOC believes that SB 956 will protect consumers by
subjecting BHPH dealers to requirements relating to
consumer disclosure and to prohibitions against false or
deceptive statements. The organization asserts that BHPH
dealers are currently exempt from these standard consumer
protections, because they do not sell their loans to
licensed institutions. SB 956 will also limit interest
rates to the federal funds rate plus 17%, which will
prevent the type of predatory 30% rates that currently
predominate the industry and which force approximately
one quarter of BHPH customers into loan default.
Finally, CAOC notes that SB 956 will slow the
repossession process down for consumers who purchase or
lease cars from BHPH dealers, and make it easier for them
to keep their vehicles and resume making their loan
payments.
b. Consumers for Auto Reliability and Safety (CARS)
supports the bill for reasons similar to those expressed
by CAOC. CARS also supports the bill, because it will
improve protections not only for civilians, but also for
military personnel. CARS notes that for decades, the
United States Armed Forces have identified predatory auto
sales practices as the number one source of financial
readiness problems facing servicemembers and their
families. Problems involving auto sales to the military
were also documented by the National Consumer Law Center
in a 2003 report titled, "In Harm's Way - at Home:
Consumer Scams and the Direct Targeting of America's
Military and Veterans." Quoting from a 2008 Sacramento
Bee article titled, "For soldiers, money is a minefield,"
CARS states that the number of U.S. Navy discharges due
to debt increased 903% between 2000 and 2005. CARS
believes that, "No doubt part of that increase is
attributable to predatory auto sales practices that would
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be curbed by enactment of SB 956."
c. Several other labor and consumer groups, including
the American Federation of State, County and Municipal
Employees, Silicon Valley Community Foundation, Consumer
Federation of California, and California Immigrant Policy
Center, and the El Segundo and Torrance Chambers of
Commerce, support the bill for reasons similar to those
expressed by CAOC.
d. The Center for Responsible Lending (CRL) also
supports the bill for similar reasons, but expresses some
concerns with the bill's definition of BHPH dealers.
CRL's concerns are similar to those expressed in question
form earlier in this analysis, and revolve around the
worry that dealers could "game" this bill's definition of
a BHPH dealer and adjust their business models to avoid
coverage under the bill.
6. Summary of Arguments in Opposition:
a. The National Alliance of Buy Here Pay Here Dealers
and National Independent Automobile Dealers Association
submitted nearly identical letters of opposition. These
groups oppose the bill on the basis that its "federal
funds rate plus 17%" interest rate cap would stifle the
efforts of finance companies that offer credible,
alternative financing programs to unbankable consumers.
Losses sustained by traditional BHPH dealers are
enormous, due to their high credit risk consumers. In
its 2011 BHPH Industry Benchmark & Trends Report, the
National Alliance reports statistic in which the average
gross dollar loss rate as a percentage of the principal
loan amount was 38.61%. In other words, dealers
operating near these benchmarks expect to lose nearly 40%
of the principal amount they lend. "Generally accepted
interest rates from around the country as regulated by
each state average more than 20% and offer legitimate
finance companies the flexibility to absorb these higher
losses that traditional businesses will not tolerate."
The trade associations also observe that BHPH dealers write
off non-performing auto contracts at an average rate of
approximately 30%. Dealers know that nearly one in three
deals they finance will end up as a charged-off account,
due to nonpayment by the customer. This bill's interest
SB 956 (Lieu), Page 9
rate cap would be a disincentive for auto dealers to
continue in the BHPH business, and would limit access to
reasonable financing for consumers who need reliable
vehicles to get to their jobs, schools, and doctors'
appointments.
The trade associations observe that several existing
agencies already provide oversight of the BHPH industry,
including the Federal Trade Commission, Consumer
Financial Protection Bureau, Internal Revenue Service,
and "a myriad of state and local agencies," and believe
that requiring BHPH dealers to obtain CFLL licenses from
DOC would be onerous for the dealerships and a financial
burden for the state.
The trade associations conclude their letters of opposition
by asserting that the solution to the problems raised by
Ken Bensinger in the LA Times articles cited above is
reasonable enforcement of existing laws and regulations,
not new legislation.
b. The Independent Automobile Dealers Association of
California (IADAC) challenges the author's assertion that
California has a problem with BHPH dealers. Despite the
fact that nearly four million cars were sold in
California last year, the Department of Motor Vehicles
received fewer than 9,300 complaints against new car
dealers, used car dealers, wholesalers, and private party
vehicle sales. Only 500 of those complaints resulted in
the suspension or revocation of a dealer's license by
DMV. For that reason, IADAC concludes that the LA Times
articles reported on an issue that is not a widespread
problem in California.
IADAC also expresses concerns expressed by individual
automobile dealerships (see arguments immediately below)
that dealers will not be willing to lend to high risk
borrowers, if an interest rate cap of 17.25% is applied
to those loans.
c. Three individual automobile dealerships, including
D&H Motors of Riverside, California, Highway Motors of
Chico, California, and Warranty Motors of Ukiah,
California, express opposition to the measure, on largely
financial grounds. These small dealerships cannot afford
the $25,000 surety bond they would be required to obtain
SB 956 (Lieu), Page 10
pursuant to the CFLL, cannot make a profit at the 17.25%
rate that would be imposed pursuant to the bill, and
believe that if a repossession occurs, the customer
should have to pay for all of the repossession costs,
before a dealer is required to reinstate that customer's
contract.
Two of the dealers asserted that the bill would subject
them to unfair competition, because subprime lenders
could charge rates much higher than 17.25%. "Small buy
her pay here auto dealers are the only competition for
large sub-prime auto lenders. This bill crushes the
small businessman and hands all of this market to big
corporate finance companies."
One of the three dealers, who states that he never intended
to become a BHPH dealer, but was pushed into the business
because of the failing economy, offered this warning:
"When the independent dealer is no longer able to sell
cars, where will the credit challenged buyer purchase
their car? A: He will buy junk from the unlicensed
dealers on the street corners, that pay no tax or DMV
fees."
7. Prior and Related Legislation:
a. AB 1447 (Feuer): Would prohibit conditional sales
contracts from requiring payment to be made in person,
and would prohibit the seller in a conditional sales
contract from doing any of the following after a sale:
phoning the buyer's references, tracking the vehicle
using GPS technology, and disabling the vehicle using
ignition override technology. Pending in the Assembly
Judiciary Committee.
b. AB 1534 (Wieckowski): Would require stickers to be
placed on used vehicles indicating their reasonable
market value, as defined. Pending in the Assembly
Judiciary Committee.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
AFSCME
SB 956 (Lieu), Page 11
California Immigrant Policy Center
Center for Responsible Lending
Consumer Attorneys of California
Consumer Federation of California
Consumers for Auto Reliability and Safety
El Segundo Chamber of Commerce
Silicon Valley Community Foundation
Torrance Chamber of Commerce
Opposition
D&H Motors, Riverside, CA
Highway Motors, Chico, CA
Independent Automobile Dealers Association of California
National Alliance of Buy Here Pay Here Dealers
National Independent Automobile Dealers Association
Warranty Motors, Ukiah, CA
Consultant: Eileen Newhall (916) 651-4102