BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 956|
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THIRD READING
Bill No: SB 956
Author: Lieu (D), et al.
Amended: 5/21/12
Vote: 21
SENATE BANKING & FINANCIAL INST. COMMITTEE : 5-2, 4/18/12
AYES: Vargas, Evans, Kehoe, Liu, Padilla
NOES: Blakeslee, Walters
SENATE JUDICIARY COMMITTEE : 3-2, 4/24/12
AYES: Evans, Corbett, Leno
NOES: Harman, Blakeslee
SENATE APPROPRIATIONS COMMITTEE : 5-2, 5/24/12
AYES: Kehoe, Alquist, Lieu, Price, Steinberg
NOES: Walters, Dutton
SUBJECT : Buy-Here-Pay-Here automobile sellers and
lenders
SOURCE : Author
DIGEST : This bill enacts 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.
ANALYSIS :
Existing law:
CONTINUED
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1. 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 percent to 30 percent per year, depending
on the unpaid balance of the loan. Administrative
fees are capped at the lesser of five percent of
the principal amount of the loan or $50.
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; are limited in the amount of delinquency
fees they may impose (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; are
prohibited from splitting loans with other; are
prohibited from requiring real property collateral,
and are limited to a maximum loan term of 60 months
plus 15 days.
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; must require loan payments to be
paid in equal, periodic installments; and must meet
certain standards before they may sell various
types of insurance to the borrower.
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:
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(1)
The amount of the loan, loan length,
and the costs, fees, and rates of charge must
be fully and clearly disclosed.
(2)
False, deceptive, or misleading
advertising is prohibited.
2. Requires all CFLL licensees to obtain and maintain a
surety bond in a minimum amount of twenty-five thousand
dollars, maintain a minimum net worth of $25,000; 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.
3. Provides for the Automobile Sales Finance Act and the
Vehicle Leasing Act, 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.
This bill:
1. Defines "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. Defines a buy-here-pay-here automobile dealer (BHPH
dealer) as a seller who meets all of the following:
A. Enters into conditional sale or lease contracts.
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B. Does not routinely assign the conditional sale
contracts or lease contracts to an unaffiliated
third-party finance or leasing source.
C. Collects payments on or otherwise services
conditional sale contracts or lease contracts.
3. Requires a BHPH to obtain a CFLL license within six
months of meeting the definition of a BHPH dealer.
4. Notwithstanding, this bill's requirement that BHPH
dealers obtain CFLL licenses, exempts 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 will
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
percent (currently 17.25 percent). Thus, the rate
caps in the CFLL will not apply to BHPH dealers.
B. BHPH dealers will 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.
5. Defines a buyer-borrower as a person who enters into a
conditional sale contract or lease contract with a BHPH
dealer.
6. Requires 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. Prohibits BHPH dealers from commencing repossession of a
vehicle until the 11th day following the date on which
payment is due.
8. Provides that, if a buyer-borrower pays the delinquent
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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. 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.
Background
This bill 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, and 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 percent. In contrast, average
interest rates at other used-car dealerships for customers
with good credit range from five to eight percent. 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 (Global
Positioning System) 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 DMV's records, the Los Angeles
Times found that Repossess Auto in Hawthorne, California,
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
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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 Los Angeles 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 Sales Finance Act and the Vehicle Leasing Act,
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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Senate Appropriations Committee, estimated
startup costs of $327,000 from the State Corporations Fund.
Costs annually, from the State Corporations Fund to
administer relevant provisions of the CFLL as it applies
to BHPH automobile dealers estimated at $200,000 to
$250,000 per 1,000 licensees; total licensees estimated
to range from 1,000 to 3,000.
All costs offset by license and assessment fees in the
CFLL.
SUPPORT : (Verified 5/24/12)
AFSCME
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
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LAX Coastal Chamber of Commerce
National Consumer Law Center
Silicon Valley Community Foundation
Torrance Chamber of Commerce
OPPOSITION : (Verified 5/24/12)
Antelope Valley Chamber of Commerce
Antelope Valley Hispanic Chamber of Commerce
Leedom Group
National Alliance of Buy Here Pay Here Dealers
National Independent Automobile Dealers Association
ARGUMENTS IN SUPPORT : The Consumer Attorneys of
California (CAOC) supports this bill, on the basis that
this 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 this bill 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. This bill will also limit interest
rates to the federal funds rate plus 17 percent, which will
prevent the type of predatory 30 percent rates that
currently predominate the industry and which force
approximately one quarter of BHPH customers into loan
default. Finally, CAOC notes that this bill 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.
ARGUMENTS IN OPPOSITION : The National Alliance of Buy
Here Pay Here Dealers and National Independent Automobile
Dealers Association submitted nearly identical letters of
opposition. These groups oppose this bill on the basis
that its "federal funds rate plus 17 percent" interest rate
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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 percent. In other words,
dealers operating near these benchmarks expect to lose
nearly 40 percent of the principal amount they lend.
"Generally accepted interest rates from around the country
as regulated by each state average more than 20 percent 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 percent. 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 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 Los Angeles Times articles cited above
is reasonable enforcement of existing laws and regulations,
not new legislation.
JJA:do 5/25/12 Senate Floor Analyses
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SUPPORT/OPPOSITION: SEE ABOVE
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