BILL ANALYSIS �
SB 956
Page 1
SENATE THIRD READING
SB 956 (Lieu)
As Amended August 24, 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 finance or leasing sources within 45 days of the
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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
vehicle due to the borrower's failure to make a scheduled
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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)Provides that for purposes of defining a BHPH dealer, a
conditional sale contract does not include contract for the
sale of a motor vehicle if all amounts owed under the contract
are paid in full within 30 days.
12)Authorizes Department of Motor Vehicles to promulgate
regulations to carry out enhanced regulation provided for in
this bill.
13)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
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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.).
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.
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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.)
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
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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
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.
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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 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.
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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 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: 0005461