SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
Bill No: SB 956 (Author: Lieu )
As Amended Amended: April 9, 2012
Hearing Date: April 24, 2012
Buy-Here-Pay-Here Automobile Dealers Act
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.
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 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, 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 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 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.
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 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.
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:
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
(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.
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.
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).)
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 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.”
The National Alliance of Buy Here, Pay Here Dealers (NABD) and the National Independent Automobile Dealers Association both 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
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
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)