BILL ANALYSIS Ó
SB 956
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Date of Hearing: August 8, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 956 (Lieu) - As Amended: August 6, 2012
Policy Committee: Banking and
Finance Vote: 7-2
Judiciary 7-3
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill provides a variety of consumer protections regarding
"buy-here, pay-here" (BHPH) automobile dealers, i.e. dealers who
enter into conditional sale or lease contracts and do not
routinely assign those contracts to an unaffiliated third-party
finance or lease source. Specifically, this bill:
1)Requires that BHPH dealers be licensed under the California
Finance Lenders Law (CFLL) and provides the Department of
Corporations with regulatory jurisdiction over the lending and
repossessing activities of BHPH dealers, pursuant to CFLL and
this bill.
2)Limits the annual percentage rate (APR) of a BHPH loan to no
more than 17% percent plus the federal funds rate.
3)Requires that a BHPH sale contract include a notice to the
buyer that the dealer may not unilaterally change financing or
payment terms, and that complaints about unfair practices may
be directed to specified enforcement entities.
4)Prohibits a BHPH dealer from repossessing a vehicle due to a
borrower's failure to make a scheduled payment during a 10-day
grace period after the payment due date.
5)Prohibits a BHPH dealer from repossessing a vehicle through
any means other than engaging the services of a licensed
repossession agency, and from charging the buyer more than
$500 for any action by the BHPH dealer to repossess the
vehicle.
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FISCAL EFFECT
This bill gives the Department of Corporations regulatory
jurisdiction over the lending and repossessing activities of
BHPH dealers. The Department 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 Department
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 California Finance
Lenders Law, all costs will be covered by fees charged to newly
licensed BHPH dealers.
COMMENTS
1)Background and Purpose. Recent reports by consumer advocates
and the Los Angeles Times have documented a number of
problematic business practices by BHPH automobile dealers
that, in the author's view, require greater consumer
protections for the predominantly low-income consumers who
patronize such dealers.
BHPH dealers get their moniker from their common practice of
requiring customers to return once or twice a month to the
dealership to make loan payments, usually in cash. The typical
BHPH business model is to stock and sell older, high-mileage
vehicles to consumers who cannot otherwise qualify for
conventional auto loans. Unlike new-car dealers, BHPH dealers
do not assign sale and lease contracts they generate to third
party finance or lease sources, meaning they do not have to
comply with underwriting and loan policies set by traditional
lenders and are free from a variety of consumer protection
regulations. Thus, BHPH dealers are able to set financial
terms that are significantly more costly for consumers than
those found in conventional auto loans and leases. Interest
rates on BHPH deals sometimes exceed 30 %, and one-fourth of
BHPH cars are reportedly repossessed and sold again.
SB 956 makes BHPH dealers subject to consumer protection
regulations, by forcing these dealers to obtain a finance
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lender's license, pursuant to the CFLL. It limits the interest
rate on BHPH loans in California to 17% plus the federal funds
rate. (The current federal rate is 0.25%). This bill
eliminates the practice of repossessing a buyer's car when the
buyer visits the dealership to make a partial payment or
discuss adjusted terms, by forcing the BHPH dealer to honor a
10-day grace period before taking steps to repossess the
vehicle. The bill also prohibits a BHPH dealer from charging a
buyer a fee exceeding $500 for repossession, and requires the
dealer to use a licensed repossession company.
2)Opposition: The BHPH industry contends this licensing
requirement would force many BHPH dealers out of business
because they could not qualify for the $25,000 bond required
for licensure by the DOC, in addition to the $50,000 bond
already required by the DMV for auto dealers.
The Independent Automobile Dealers of Association of
California (IADAC) states: "Dealers are not lenders, they are
sellers of used cars on credit, and therefore they should not
be required to be licensed by the Department of Corporations."
3) Related Legislation : AB 1447 (Feuer) requires a BHPH dealer
to issue a 30-day or 1,000-mile warranty to the buyer or
lessee of a used vehicle bought or leased at retail price, and
requires the warranty to cover specified items. Among other
things, the bill would prohibit the dealer from requiring a
buyer to make payments in person, from tracking a vehicle
using GPS technology, and from disabling a vehicle with
ignition override technology.
AB 1534 (Wieckowski) would require a BHPH dealer to affix a
label on each vehicle that states the reasonable market value
of the vehicle and other specified information.
AB 1447 and AB 1534 are pending in the Senate Appropriations
Committee.
Analysis Prepared by : Jonathan Stein / APPR. / (916) 319-2081
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