BILL ANALYSIS �
SB 956
Page 1
SENATE THIRD READING
SB 956 (Lieu)
As Amended August 20, 2012
Majority vote
SENATE VOTE :24-12
BANKING & FINANCE 7-2 JUDICIARY 7-3
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|Ayes:|Eng, Fletcher, Gatto, |Ayes:|Feuer, Atkins, Dickinson, |
| |Roger Hern�ndez, Lara, | |Huber, Monning, |
| |Perea, | |Wieckowski, |
| |Torres | |Bonnie Lowenthal |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Harkey, Morrell |Nays:|Wagner, Gorell, Jones |
| | | | |
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APPROPRIATIONS 12-5
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|Ayes:|Gatto, Blumenfield, |
| |Bradford, Charles |
| |Calderon, Campos, Davis, |
| |Fuentes, Hall, Hill, |
| |Cedillo, Mitchell, |
| |Solorio |
| | |
|-----+--------------------------|
|Nays:|Harkey, Donnelly, |
| |Nielsen, Norby, Wagner |
| | |
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SUMMARY : Establishes the Buy-Here-Pay-Here (BHPH) Automobile
Dealers Act. Specifically, this bill :
1)Defines a BHPH automobile dealer as a dealer that does the
following:
a) Enters into a conditional sale or lease contract; and,
b) Assigns less than 90% of all unrescinded conditional sale
contracts and lease contracts to unaffiliated third party
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finance or leasing sources within 45 days of the consummation
of those contracts.
2)Specifies that the term BHPH does not include:
a) A lessor who primarily leases vehicles that are two model
years old or newer; and,
b) A dealer that does both of the following:
i) Certifies 100% of used vehicle inventory offered for
sale at retail price; and,
ii) Maintains an onsite service and repair facility that
is licensed by the Bureau of Automotive Repair and employs
a minimum of five master automobile technicians.
3)Requires BHPH dealers to be licensed under the California
Finance Lenders Law (CFLL).
4)Provides that an automobile dealer that meets the definition of
BHPH to become licensed under the CFLL within six months of
meeting the definition.
5)Limits the annual percentage rate (APR) of a BHPH loan to no
more than 17% plus the federal funds rate in effect at the time
the contract was executed.
6)Provides that a BHPH conditional sale contract shall include the
following notice in 8-point boldface type: "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 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. I have read and understand the
terms of this notice."
7)Prohibits a BHPH dealer from commencing repossession of a
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vehicle due to the borrower's failure to make a scheduled
payment prior to the 16th day following the date on which that
payment was due.
8)Provides that if a BHPH borrower pays the delinquent amount in
full, the borrower shall be entitled to 45 days thereafter to
pay the BHPH dealer the amount of any delinquency charges,
penalty interest and fees arising out of the delinquency and
commencement of repossession proceedings.
9)Prohibits a BHPH from doing the following:
a) Repossessing a vehicle other than through engaging the
services of a licensed repossession agency; or,
b) Charging a buyer fees or charges in excess of $500
resulting from the commencement by the BHPH dealer of any
action to repossess the vehicle.
10)Specifies that a seller is not a BHPH automobile dealer if the
seller does both of the following:
a) Certifies 100% of seller's vehicles; and,
b) Maintains an on-site service and repair facility that is
licensed by the Bureau of Automotive Repair and employs a
minimum of five master automobile technicians as certified by
the National Institute for Automotive Service Excellence.
11)Makes findings and declarations.
EXISTING LAW :
1)Provides that under 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
conditional sales contracts, including, among other things,
provisions relating to disclosure of fees, the terms of the
contract, and repossession. (Civil Code Section 2981 et seq.)
2)Provides for the 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 (FC) Sections 22000 et seq.).
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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 (FC Sections 22303
and 22304). Administrative fees are capped at the lesser of 5%
of the principal amount of the loan or $50. An administrative
fee of $75 may be charged for loans of $2,500 or more (FC
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 (FC Section 22309); are
limited in the amount of delinquency fees they may impose (FC
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 (FC Section 22325); are
prohibited from splitting loans with other licensees (FC
Section 22327); are prohibited from requiring real property
collateral (FC Section 22330); and, are limited to a maximum
loan term of 60 months plus 15 days (FC 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 (FC Section 22154); must require
loan payments to be paid in equal, periodic installments (FC
Section 22307); and, must meet certain standards before they
may sell various types of insurance to the borrower (FC
Sections 22313 and 22314); and,
d) Generally speaking, the terms of loans of $10,000 or above
are not restricted under the CFLL.
3)Authorizes the licensure of finance brokers under the CFLL, and
defines a finance broker as any person who is engaged in the
business of negotiating or performing any act as a broker in
connection with loans made by a finance lender (Section 22004).
4)Imposes a 36% APR on consumer credit extended to members of the
military and their dependents. (10 United States Code Section
987.)
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FISCAL EFFECT : According to the Assembly Appropriations
Committee, this bill gives the DOC regulatory jurisdiction over
the lending and repossessing activities of BHPH dealers. The DOC
anticipates first-year start-up costs of $327,000 to $375,000 to
fund three positions, primarily for the initial licensing of BHPH
dealers. The DOC anticipates annual costs of $670,000 to fund 5.5
positions. The ongoing costs would fund routine regulatory
examinations, receiving and investigating complaints, review of
annual reports, enforcement actions, and other work related to the
continued maintenance of licenses. Pursuant to an existing
provision of the CFLL, all costs will be covered by fees charged
to newly licensed BHPH dealers.
COMMENTS :
Need for the bill : According to information provided by the
author's office, the following expresses the need for this bill:
Buy Here, Pay Here used car dealers are a largely
unregulated industry within the used car industry that
has taken advantage of a gap in regulations to prey on
vulnerable populations. These abuses were documented
in a fall 2011 investigative series by The Los Angeles
Times that exposed the suspect business practices of
these below-the-radar dealerships.
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
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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 Times.
There are a number of intriguing facts that speak to
the questionable practices of BHPH dealerships:
Buy Here, Pay Here dealerships sold
2.4 million automobiles in 2010, up from 1.3
million in 2000.
Market research estimates there are
up to 33,000 such lots nationwide, compared to
22,000 new car dealerships.
Buy Here, Pay here dealerships make
about $80 billion in loans annually, according
to the Federal Insurance Deposit Corp.
Profit margins average about 40%,
which doubles what new car dealerships
typically earn according to a trade group, the
National Alliance of Buy Here, Pay Here
Dealers.
Interest rates for loans from the
dealerships can top 30%. Average rates at
other used-car dealers for customers with good
credit range from 5 to 8%, according to HSH
Associates.
About one in four buyers at Buy Here,
Pay Here dealerships default.
Current law states that used car dealers offering BHPH
loans are exempt from the laws associated with finance
lenders and the protections applied for consumers.
The Rees-Levering Automobile and Sales Act does apply
to BHPH dealers yet these regulations treat all car
dealers the same regardless if the dealer acts like a
financial institution. Consequently, the consumers of
BHPH dealers are suffering due to the lack of
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regulations that would otherwise protect them from
dubious business practices.
SB 956 seeks to create consumer protections from the
financial practices of BHPH dealers and to limit this
business model that ratchets up profits by exploiting
customers.
Background :
BHPH dealerships differ from traditional auto finance, in that
BHPH auto sales are constructed as installment plans, similar to
rent-to-own stores, allowing dealers to establish their own
standards and interest rates. In a traditional auto finance
transaction, the purchase money is provided by a third party
lender not affiliated with the dealer. The dealer gets the
purchase money for the car, and the borrower is then responsible
to the lender for maintaining the loan. Loans under this common
scenario are regulated under various federal laws including the
Truth in Lending Act, Consumer Leasing Act, Equal Credit
Opportunity Act and the Fair Credit Reporting Act. Again, BHPH
transactions are structured as installment contracts, thus falling
outside the scope of federal and state laws that govern loan
transactions.
According to Forbes, "Subprime Auto Loans Grow as Lenders Charge a
Premium," subprime auto finance is growing business as investors
purchased $5.8 billion in asset backed securities (ABS) during the
first quarter of 2012. Subprime loans accounted for 23% of new
car loans, and 57% of used car loans in the first quarter of 2012.
These numbers several percentage points from the same time last
year. "Deep subprime" borrowers (those with scores below 550)
paid an average 17.9% APR. In 2011, BHPH loans accounted for
around 20% of the used auto loans.
The Los Angeles Times series on BHPH exposed that the high
interest rates are not the only drain on the resources of
customers. Typically, the cars purchased are high mileage,
increasing the likelihood of expensive repairs on the part of the
driver, adding to the overall costs of the vehicle. Not only are
interest rates high on automobiles near the end of their life
span, but the purchase price (on which the installment contract is
based) is usually inflated far beyond its Blue Book value. In one
case highlighted in the Times series one customer with a four year
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loan at 22% APR will end up paying four times the Blue Book value.
These costs do not take into account the repairs that would be
necessary for an older car over a four year period.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0005029