BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 956 ( Lieu)
As Amended April 9, 2012
Hearing Date: April 24, 2012
Fiscal: Yes
Urgency: No
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SUBJECT
Buy-Here-Pay-Here Automobile Dealers Act
DESCRIPTION
This bill would enact the "Buy-Here-Pay-Here Automobile Dealers
Act" and would deem certain automobile dealers to be
"buy-here-pay-here automobile dealers," as specified. This bill
would impose requirements on these automobile dealers, including
that they obtain a finance lender license and be subject to the
California Finance Lenders Law, which is intended to protect
borrowers against unscrupulous lending practices. This bill
would also limit the annual percentage rate that may be charged
to a borrower by a buy-here-pay-here dealer to the federal funds
rate in effect at the time of the contract plus an additional 17
percent. This bill would impose other requirements on
buy-here-pay-here automobile dealers regarding the notice that
is provided to a buyer at the time the contract is executed and
the ability of the dealer to repossess the vehicle for
nonpayment.
BACKGROUND
The California Finance Lenders Law (CFLL) is intended to protect
borrowers against unscrupulous lending practices. The
Department of Corporations (DOC) administers the CFLL and
licenses finance lenders who may make secured and unsecured
consumer and commercial loans under that law. The Automobile
Sales Finance Act (ASFA or Rees-Levering Act) and the Vehicle
Leasing Act both seek to protect purchasers of motor vehicles
from excessive charges by requiring conditional sales contracts
and lease contracts to contain numerous disclosures regarding
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the amounts paid for vehicle license, registration, title,
transfer, and other specified fees. Both statutes also govern
the terms of conditional sales contracts and lease contracts and
contain consumer protections regarding repossession.
Buy-here-pay-here automobile dealerships have gained recent
attention after the Los Angeles Times published a three-part
series on these dealers in Fall 2011, which described 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%, 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%. 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. . . .
Buy Here Pay Here 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 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,
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even eight times apiece, motor vehicle records show. (A
vicious cycle in the used-car business, Los Angeles Times
(Oct. 30, 2011).)
This bill would require buy-here-pay-here automobile dealers to
obtain a finance lender license and would subject them to the
CFLL. This bill would contain other related consumer
protections.
CHANGES TO EXISTING LAW
Existing law , the California Finance Lenders Law (CFLL), caps
interest rates that may be charged by CFLL licensees who make
consumer loans under $2,500. Those caps range from 12 percent
to 30 percent per year, depending on the unpaid balance of the
loan. (Fin. Code Secs. 22303, 22304.)
Existing law caps administrative (origination) fees that may be
charged for such loans at the lesser of five percent of the
principal amount of the loan or $50. (Fin. Code Sec. 22305.)
Existing law caps the amount of delinquency fees that CFLL
lenders who make consumer loans under $5,000 may impose. Those
fees are capped at a maximum of $10 on loans that are more than
10 days delinquent and $15 on loans 15 days or more delinquent.
(Fin. Code Sec. 22320.5.) Existing law requires CFLL lenders to
prominently display their schedule of charges to borrowers.
(Fin. Code Sec. 22325.) Existing law places other requirements
on CFLL licensees who make consumer loans under $10,000
including that they are limited in their ability to conduct
other business activities on the premises where they make loans
(Fin. Code Sec. 22154) and must require loan payments to be paid
in equal, periodic installments (Fin. Code Sec. 22307).
Existing law provides that the terms of consumer loans of
$10,000 or above are not restricted under the CFLL, although all
consumer loans made under the CFLL are subject to the following
requirements: (1) the amount of the loan, loan length, and the
costs, fees, and rates of charge must be fully and clearly
disclosed (Fin. Code Secs. 22163, 22164, and 22332); and (2)
false, deceptive, or misleading advertising is prohibited (Fin.
Code Sec. 22161).
Existing law , the Automobile Sales Finance Act (also known as
the Rees-Levering Motor Vehicle Sales and Finance Act), sets
forth various consumer protections relating to automobile
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conditional sales contracts, including, among other things,
provisions relating to disclosure of fees, the terms of the
contract, and repossession. (Civ. Code Sec. 2981 et seq.)
This bill would require every vehicle dealer to perform
calculations on an annual basis that relate to the percentage of
the dealer's conditional sales contracts or lease contracts that
were assigned or sold to an unaffiliated third party within 30
days of consummation.
This bill would provide that a vehicle dealer that assigns fewer
than 90 percent of all conditional sales contracts and lease
contracts to unaffiliated third parties within 30 days of
consummation of those contracts as calculated pursuant to the
above is deemed to be a "buy-here-pay-here automobile dealer."
This bill would require buy-here-pay-here automobile dealers to
be licensed by the Department of Corporations pursuant to the
CFLL and would require a buy-here-pay-here dealer to obtain a
CFLL license no later than six months after it meets the
definition of a buy-here-pay-here automobile dealer.
This bill would specify that a conditional sales contract or
lease contract entered into by a buy-here-pay-here dealer shall
be subject to specified provisions of the CFLL.
This bill would prohibit the annual percentage rate charged to a
buyer-borrower pursuant to a conditional sales contract or lease
contract with a buy-here-pay-here dealer from exceeding 17
percent plus the federal funds rate in effect at the time of the
contract.
This bill would require a buy-here-pay-here dealer to include a
notice, in at least eight-point boldface type, in its
conditional sales contracts or lease contracts that states the
following:
If you have a complaint concerning this buy-here-pay-here
automobile dealer or the contract, you should try to resolve
it with the dealer. Complaints concerning unfair or deceptive
practices or methods by the dealer may be referred to the city
attorney, the district attorney, an investigator for the
Department of Motor Vehicles, or an investigator for the
Department of Corporations, or any combination thereof.
After this contract is signed, the dealer may not change the
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financing or payment terms unless you agree in writing to the
change. You do not have to agree to any change, and it is an
unfair or deceptive practice for the dealer to make a
unilateral change.
This bill would provide that the conditional sales contract or
lease contract shall not be binding unless the buyer-borrower
has acknowledged in writing that he or she has read and
understands the notice described above.
This bill would impose an 11-day grace period before a
buy-here-pay-here dealer may repossess a vehicle and would
require the dealer to use a licensed repossession company to
repossess the vehicle.
This bill would specify that if the buyer-borrower pays a
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, and fees arising out of the
delinquency and commencement of repossession proceedings.
This bill would prohibit a buy-here-pay-here dealer from
charging a buyer-borrower a fee or charge for repossession that
exceeds $500.
This bill would specify that the provisions relating to
repossession would be included in the terms and conditions of a
conditional sales contract or lease contract.
This bill would exempt buy-here-pay-here dealers from certain
provisions of the CFLL, including that buy-here-pay-here dealers
would be exempt from CFLL provisions regarding fees that may be
charged for dishonored checks, allowable delinquency fees, and
prohibitions against taking a deed of trust, mortgage or lien
upon real property as security for a loan.
COMMENT
1. Stated need for the bill
The author writes:
"Buy Here, Pay Here" 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
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necessities of life, but cannot qualify for conventional car
loans. These dealers markup ageing, 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. . . .
Buy Here, Pay Here dealers differ from more traditional car
sellers in that the dealers "hold" the car loans instead of
selling/assigning it off to a third-party lender, such as a
bank or finance company. This is often unknown by the car
buyer. The interest on loans associated with Buy Here, Pay
Here dealerships is several times higher than the market rate
for used car loans, and the dealers charge up to three times
the Bluebook value of the vehicle. Many of the loans require
customers to make substantial down payments and physically
return to the dealership to make twice-monthly payments.
These dealers finance the sales of these usually road-worn
vehicles at interest rates that forces customers to default at
a 25-percent rate. When the customer defaults, the dealer
repossesses the car and resells it to another customer-thus
gaining yet another down payment and yet another predatory
loan. Some vehicles have been sold, repossessed, and re-sold
as many as eight times, according to the �Los Angeles] Times.
2. Definition of buy-here-pay-here automobile dealer
This bill would not apply to every vehicle dealer who enters
into conditional sales contracts or lease contracts. Instead,
this bill's restrictions would apply only to "buy-here-pay-here
automobile dealers" who enter into conditional sales contracts
or lease contracts. According to the author's office, most
buy-here-pay-here dealers hold onto the loans that they make.
As a result, this bill would include in the definition of
"buy-here-pay-here automobile dealer" those dealers that assign
fewer than 90 percent of all conditional sales contracts or
lease contracts to unaffiliated third parties within 30 days of
consummation of the contract.
In order to determine whether or not a vehicle dealer met the 90
percent threshold, this bill would require every dealer to
annually perform calculations based on the percentage of the
dealer's conditional sales contracts or lease contracts that
were assigned or sold to an unaffiliated third party within 30
days of consummation.
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As noted above, most buy-here-pay-here automobile dealers do not
assign their conditional sales contracts or lease contracts to
unaffiliated third parties and would therefore be covered by
this bill. Some buy-here-pay-here automobile dealers, however,
assign their contracts to a third party that is closely aligned
with the dealer and, while technically "unaffiliated," is not
separate from the dealer. The author's office indicates that
the bill is intended to cover these dealers.
The Center for Responsible Lending supports the measure and
indicates that it has concerns regarding the current definition
of buy-here-pay-here dealer, "that the definition excludes some
of the precise dealers targeted by the bill, and whether others
could simply adjust their model in order to avoid coverage by
the bill." With respect to the latter point, as noted above,
the bill would include in its definition of buy-here-pay-here
dealers those dealers that assign fewer than 90 percent of all
conditional sales contracts or lease contracts to unaffiliated
third parties within 30 days of consummation of the contract.
This definition raises the potential concern that a
buy-here-pay-here dealer could realize that it is getting close
to meeting the 90 percent standard as the calendar year comes to
a close and could thus enter into additional contracts that are
assigned to unaffiliated third parties in order to stay under
the 10 percent threshold. In order to address this concern so
that the definition is not easily manipulated, and the bill
targets the buy-here-pay-here dealers that it intends to target,
the following amendment is suggested:
Suggested amendments :
On page 6, delete lines 23 - 40
On page 7, delete lines 1 - 11
Insert new Section 18502 to read:
18502. "Buy-here-pay-here dealer" means a seller who does all
of the following:
(a) Enters into conditional sale contracts, within the meaning
of subdivision (a) of Section 2981 of the Civil Code or lease
contracts, within the meaning of subdivision (d) of Section
2985.7 of the Civil Code;
(b) Does not routinely assign the contracts described in
paragraph (a) to an unaffiliated third party finance or
leasing source; and
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(c) Collects payments or otherwise services those contracts
described in paragraph (a).
3. Requiring buy-here-pay-here automobile dealers to become
licensed under the California Finance Lenders Law (CFLL)
This bill would require buy-here-pay-here automobile dealers to
be licensed by the Department of Corporations pursuant to the
CFLL and would require a buy-here-pay-here dealer to obtain a
CFLL license no later than six months after it meets the
definition of a buy-here-pay-here automobile dealer. The author
asserts that while the existing consumer protections under the
Rees-Levering Automobile Sales Act do apply to buy-here-pay-here
dealers, "these regulations treat all car dealers the same
regardless if the dealer acts like a financial institution.
Consequently, the consumers of Buy Here, Pay Here dealers are
suffering due to the lack of regulations that would otherwise
protect them from dubious business practices."
Although buy-here-pay-here dealers are exempt from lending laws,
they make and service their own loans. They are not currently
regulated as lenders, despite being covered under the
Rees-Levering Automobile Sales Act and the Vehicle Leasing Act.
It is this gap the author is seeking to close by subjecting
these dealers to the CFLL.
4. Repossession
This bill would impose an 11-day grace period before a
buy-here-pay-here dealer may repossess a vehicle. Under the
bill, if the buyer-borrower pays a 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,
and fees arising out of the delinquency and commencement of
repossession proceedings. The bill also prohibits a
buy-here-pay-here 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. The author asserts that these provisions are intended
to change the way buy-here-pay-here dealers "are able to
repossess vehicles" by imposing a ten-day grace period, which,
according to the author, is a consumer protection often offered
by most car dealers. The repossession provisions in this bill
are also intended to make it easier for a borrower to reinstate
a repossessed car and to prevent additional charges for
repossession being imposed.
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Under this bill, a buy-here-pay-here dealer would be required to
use a licensed repossession company to repossess the vehicle.
This provision is intended to address circumstances like the one
in which Tiffany Lee found herself as described in the Los
Angeles Times article noted earlier:
A year and a half later, 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. Lee, who described that night as "one of the worst
experiences of my life," had stumbled into the bare-knuckle
world of Buy Here Pay Here used-car sales. (A vicious cycle
in the used-car business, Los Angeles Times (Oct. 30, 2011).)
5. Support
Consumers for Auto Reliability and Safety (CARS) supports the
measure, writing:
This legislation will help address predatory auto sales
practices and improve protections for vulnerable consumers who
either lack credit or have low credit scores, including
students, single parents, recent immigrants, people who lost
their jobs due to the recession, and members of the United
States Armed Forces who purchase vehicles in California. . .
. We understand that the author intends for the bill to
specifically address sales by "Buy-Here-Pay-Here" dealers, who
either hold their own paper and accept payments from their
customers or assign contracts to affiliated entities. We
�are] looking forward to working with the author and Members
to help ensure that the bill focuses properly on the dealers
whose practices have given rise to the bill. . . .
In addition, for decades, the U.S. Armed Forces have
identified predatory auto sales practices as the #1 source of
financial readiness problems facing Servicemembers and their
families. The San Diego Union-Tribune exposed similar
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practices, reporting that: "These days at Camp Pendleton and
the �32nd Street] Naval Station �in San Diego], used car
dealerships are the No. 1 money pit for service members, Maj.
Daniel P. Harvey, a lawyer at Camp Pendleton, said....Harvey
estimated that 450 Marines a year come to his legal-assistance
office seeking relief from contracts riddled with high fees
and interest rates....'Marines walk into a place that
advertises $99 down and you can leave with a car...There was a
Marine who bought a 1995 Neon, and between the cost of the car
and the interest rate, that car was going to cost $45,000.'
The vehicle is worth $2,000 to $3,000, according to Web sites
such as www.edmunds.com and www.consumerguide.com. Harvey
said the Marine is bound to pay the $45,000 unless the
used-car dealer decides to let him off the hook."
Supporter Torrance Area Chamber of Commerce writes, "Buy Here,
Pay Here used car dealers are a largely unregulated industry
that has taken advantage of a gap in regulations to prey on
desperate workers and low-income families. These dealers target
people who need cars to get to work and manage the daily
necessity of life, but cannot quality for conventional car
loans. By financing cars at interest rates of 30 percent or
higher and marking up by 200 percent the value of aging cars,
these dealers make it impossible for these customers to keep up
with their loans which often leads to default. This business
model allows the dealers to keep any down payments and cash
installments made and re-sell the vehicle to another buyer."
Consumer Attorneys of California supports the bill, writing that
it "closes many loopholes that have allowed Buy Here, Pay Here
dealerships to prey on vulnerable and low-income consumers. The
Buy Here, Pay Here model is currently the most profitable and
fastest growing type of auto dealership, precisely because these
dealerships are not bound by ordinary consumer protection rules.
SB 956 levels the playing field by holding Buy Here, Pay Here
dealerships to many of the same standards that traditional
dealerships abide by. The mere fact that Buy Here, Pay Here
customers are high credit risk does not justify current
practices any more than it would justify illegal loan sharking.
All consumers, regardless of their economic situation, deserve
the full protections of the law."
6. Opposition
The National Alliance of Buy Here, Pay Here Dealers (NABD) and
the National Independent Automobile Dealers Association both
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oppose the measure, writing:
�W]e feel that a cap on interest rate equal to the Fed Rate
plus seventeen percent as contained in the bill would stifle
the efforts of finance companies that offer credible,
alternative financing programs to consumers who cannot
otherwise secure credit. The losses sustained by traditional
buy here pay here (BHPH) dealers are enormous due to the
highly specialized financial services they offer to high risk
credit consumers in our communities. In 2011, loss statistics
for BHPH dealers as provided by NABD note the average gross
dollar loss rate as a percentage of the principal loan amount
was 38.61%. In other words, it was an acceptable industry
standard for traditional BHPH dealers to lose on average
nearly 40% of their principal loan amount.
An individual used-car dealer wrote in opposition to the
measure, stating "I have been a used-car dealer for over four
years and help credit challenged buyers with financing at my
dealership. SB 956 will hurt my business and my customers
because I cannot afford another $25,000 bond for the Finance
Lender license. Also, the 17.25% interest rate is much less
than they would be charged at another dealer who finances
through a sub-prime lender. That is unfair competition. Also,
if repossession occurs the customer should have to pay for all
costs to reinstate the contract. The dealer should not have to
lend him any more money than was originally agreed upon."
The Independent Automobile Dealers Association of California
opposes the bill, arguing, among other things, that the bill
will result in dealers no longer offering "BHPH or �doing] just
enough BHPH to stay within the lower limits of the definition
which will result in fewer choices for the credit-challenged
consumer."
Support : American Federation of State, County and Municipal
Employees (AFSCME), AFL-CIO; California Immigrant Policy Center;
California Reinvestment Coalition; Center for Responsible
Lending; Consumers for Auto Reliability and Safety (CARS);
Consumer Attorneys of California; Consumer Federation of
California; El Segundo Chamber of Commerce's Government &
Military Affairs Committee and Board of Directors; LAX Coastal
Area Chamber of Commerce; Silicon Valley Community Foundation;
Torrance Area Chamber of Commerce
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Opposition : Independent Automobile Dealers Association of
California; Leedom Group; National Alliance of Buy Here, Pay
Here Dealers (NABD); National Independent Automobile Dealers
Association; several individuals
HISTORY
Source : Author
Related Pending Legislation :
AB 1447 (Feuer) would prohibit a person selling or leasing a
motor vehicle under a conditional sale contract to require a
buyer to make payments, other than the down payment, in person
and would require the seller to display the vehicle's sale price
on the vehicle. The bill would also prohibit the seller from
calling a buyer's references after the sale of the vehicle and
would prohibit a seller from tracking the vehicle using Global
Positioning System (GPS) technology and from disabling the
vehicle with ignition override technology. This bill is
currently set for hearing in the Assembly Judiciary Committee on
April 24, 2012.
AB 1534 (Wieckowski) would require a used car dealer to affix a
label on a vehicle that states the reasonable market value of
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. This bill is currently set for hearing in the
Assembly Judiciary Committee on April 24, 2012.
Prior Legislation : None Known
Prior Vote : Senate Banking and Financial Institutions Committee
(Ayes 5, Noes 2)
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