California BHPH Legislation Receives More Assembly Committee Approval
By Nick Zulovich, Editor
July 06, 2012
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SACRAMENTO, Calif. — With the Fourth of July falling during the middle of California's
last legislative week before its summer recess, two lawmaker committees pushed ahead
bills that would greatly regulate how buy-here, pay-here dealerships operate.
After already gaining majority support from the Assembly's Banking and Finance Committee, the chamber's Judiciary Committee voted by a 7-3 margin in favor of SB 956, which has a goal of capping BHPH interest rates at 17.25 percent among other objectives.
Meanwhile, the Senate's Judiciary Committee also approved two BHPH bills originating out of the Assembly.
By a 3-1 count, the committee voted in favor of AB 1534 written by Assemblyman Bob Wieckowski.
AB 1534 would require a BHPH dealer to display a label on any used vehicle offered for retail sale that states the "reasonable market value" of the unit. The bill would require the label to contain specified information used to determine the vehicle's reasonable market value and the date the value was determined.
Moreover, AB 1534 would require a BHPH dealer to provide to a prospective buyer of the used vehicle a copy of any information obtained from a nationally recognized pricing guide the dealer utilized to determine the reasonable market value of the vehicle.
"This is simply not a matter of let the buyer beware," Wieckowski said. "Predatory pricing, harsh default terms and swift repossession practices should not be tolerated in the marketplace. This bill protects vulnerable consumers who are the most at-risk of overpaying for vehicles. Although the buy-here, pay-here industry wants us to believe they are just helping those with bad credit, the truth is they are offering customers a bad deal that is likely to put them further in debt."
Meanwhile, the Senate Judiciary Committee by the exact same margin approved AB 1447 orchestrated by Assemblyman Mike Feuer, who also chairs that chamber's Judiciary Committee that moved along SB 956.
Also by a 3-1 vote, the approved AB 1447 would create regulation, including:
—Require BHPH dealers to provide a limited warranty that covers most major components and lasts for at least 30 days or 1,000 miles.
—Prohibit BHPH dealers from requiring a buyer to make regular payments in person.
—Require BHPH dealers receive written consent from the buyer prior to selling a vehicle with an electronic tracking device.
—Require BHPH dealers to provide notice to the buyer of the presence of ignition shutdown technology in the vehicle and that such technology be set to provide advance warnings to the driver to help avoid stranding drivers.
"Without the protections included in AB 1447, mostly low-income Buy-Here-Pay-Here customers can't be sure they are buying dependable vehicles," Feuer said. "That's why my bill requires a minimum warranty and other critical safeguards that help ensure buyers are paying for reliable transportation."
After wrapping up business today, California lawmakers are in recess until Aug. 6. Both AB 1447 and 1534 are set to be taken up by the Senate Appropriations Committee when legislators reconvene.
The Assembly's Appropriations Committee is scheduled to discuss SB 956 after the recess, as well.
California Independent Dealers Object Again
Bill Dohring, the only individual testifying against the Senate bill before the Judiciary Committee earlier this week, began his comments by saying he admired the tenacity on this issue put forth by Sen. Ted Lieu, the author of SB 956.
"However, in the 36 years I've been here I can't fathom that you would introduce a bill of this magnitude based upon three articles in the LA Times, innuendo and horror stories that there is yet to be any hard data. None at all. DMV doesn't have any," Dohring stated.
Dohring went on to share that he had "somewhat of a retraction" from Ken Bensinger, the newspaper reporter who developed the investigation into BHPH dealers printed by the Los Angeles Times late last year. Dohring indicated Bensinger told him, "he did not do an exhaustive study and most of the problems, especially like on the repossessions, were out of state. They weren't in California."
The IADAC representative added more issues he believes SB 956 could create if it becomes law, beginning when a BHPH dealer repossesses and resells a vehicle.
"Existing law under the finance code and the civil code requires the dealer, yes they repossess it, and they sell it, but they have to give any surplus back to buyer. That's again in both the financial and civil code," Dohring reminded the committee.
"Relative to the interest rate cap, it is a little low, but we don't have to worry about it because if this bill becomes law, we would have to get a $25,000 bond from the corporations in addition to the $50,000 bond we have with the Department of Motor Vehicles. Unlike insurers, you have to qualify for that bond, and the dealers wouldn't be able to qualify for it because you have to have roughly 10 times your assets. That would be about $750,000 liquid assets not to mention the $25,000 daily liquidity requirement," he went on to explain.
Dohring also pointed out that Experian Automotive data that revealed only about 20 percent of all dealers fall into the BHPH segment.
"If the Senator wanted to do something, he would make it apply to all dealers," Dohring proposed. "Say there are 10,000 dealers. Roughly the other 8,000 can sell their paper to a subprime lender at a 25-percent interest rate all day long and this bill wouldn't apply to them.
"We ask for a no vote," he said in closing his testimony time.
Dohring made similar pleas to senators when SB 956 still was being heard by committees in that chamber.
Despite some questions from members, the bill was approved by the Assembly's Judiciary Committee to be sent to the chamber's Appropriations Committee for further deliberation.
Specifically, Senate Bill 956 has three main goals:
—Impose first-ever regulations on dealers offering buy-here, pay-here installment loans by requiring them to obtain a California Finance Lender's license.
—Limit used-vehicle installment loans to an interest rate of no more than 17.25 percent, which would give California the strongest cap in the nation.
—Change the way BHPH dealers are able to repossess vehicles to include grace periods and make it easier for buyers to reinstate a repossessed unit.
"Senate Bill 956 seeks to regulate an industry that is currently unregulated under state law," Lieu reiterated before the Assembly Judiciary Committee.
"These buy-here, pay-here used-car dealers take advantage of our lack of laws to prey on desperate workers, low-income families and members of the military by pushing unregulated loans to sell cars for far beyond market value," Lieu proclaimed.
"As it now stands, used-car dealers offering these ‘buy here, pay here' loans are exempt from many of the protections that apply to other areas of finance," Lieu insisted. "Without these protections, consumers are paying the price — often an exorbitant price."
More Judiciary Committee Discussion on SB 956
Before taking the vote, Assembly Judiciary Committee vice chairman Donald Wagner brought up a point first raised in a letter from the National Independent Automobile Dealers Association. Wagner indicated that while a BHPH dealer could only charge 17.25 percent APR to sell a 2001 Honda Accord, a franchised or independent store could sell the same model with a contract calling for 24 percent APR.
Wagner asked Lieu, "Is it accurate? If so, how in the world is that fair and perhaps even constitutionally treating those two folks so differently?"
Lieu quickly responded to Wagner's query.
"It's not accurate because a new-car dealer just doesn't charge that much. That's why you don't see new-car dealers here in opposition to this bill," he said.
To continue to argument, Lieu then touched on America's Car-Mart, which is headquartered in Bentonville, Ark., and has a network of more than 100 BHPH dealerships primarily in the Southeast.
"Car-Mart is expanding and making significant profit with an average annual interest rate of 14.6 percent," Lieu stated. "Ours is even higher than that. The reason we chose that interest rate is because Nebraska has a flat 18 percent rate. We thought we'd have a flexible one that when the economy got better, you could go above 18 percent."
Lieu went on to explain how he believes a BHPH dealership operates to assuage Wagner's concerns. He made his remarks in light of another BHPH legislation bill written by Assemblyman Mike Feuer, who also is chair of the Judiciary Committee.
"The reason they are different is because their business model is different," Lieu insisted. "When you walk into a new-car dealer or a normal used-car dealer and let's say you get a car from a third-part financer, say Bank of America, what happens is Bank of America will pay that dealership say $30,000. You get the car and you have a relationship with Bank of America. They don't want you to default. They want you to pay off your loan. It costs Bank of America a bunch of unnecessary time and money to default and repossess the car.
"Buy-here, pay-here dealers are very different," Lieu continued in Judiciary Committee testimony. "They have an astronomical default rate of anywhere between 25 and 33 percent compared to subprime dealers at 2 percent. That's because their business model, they don't care if you default. They get the car back and then they resell it.
"Their business model isn't for you to pay off the loan. It's to take the car back and resell and get another down payment," Lieu added in reference to the Los Angeles Times reporting that some BHPH dealers resold a vehicle eight times. "That's why they're treated different."
Another Judiciary Committee member, Assemblyman Roger Dickinson, also commented on the measure.
"I listened to the opposition testimony with great care," Dickinson began. "I just want to note that in my own experience I saw this kind of practice occurring. I saw this kind of abuses of consumers by dealers. Certainly it's something where we cannot and ought not have a broad brush painting dealers with this. Most dealers are very honest straightforward business people.
"But there is a subset out there that clearly takes advantage of the circumstances," he continued. "I think I commented that I didn't think they went far enough. In any event, I hope there will be legislation that emerges to be signed into law, whatever it is, in this aura of bill that are pending. This is a practice that we need to address because there are too many people being abused under the current circumstances
As Lieu mentioned, Judiciary Committee chairman Feuer is the author of AB 1447, which gained approval from the Senate Judiciary Committee.
"We are a part of a triumvirate of authors on this issue," Feuer said during the Assembly Judiciary Committee's meeting this week. "The one point that I think is important to make is by the time these bill have collectively made their way through the legislative process, there will be a common definition applicable to the universe of dealers we are talking about. We are still sorting through the nuances of that, but that needs to be the case."
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