Legislature’s hit-and-run attack on car dealers

April 25, 2012

By Katy Grimes

SACRAMENTO — Maybe the California Legislature should just take over state car dealers the way the Obama administration took over General Motors and Chrysler.

That might be better than the Democratic-controlled Legislature driving over the dealers.

Three bills are moving through the Legislature targeting “buy-here pay-here” California auto dealers for alleged predatory sales and lending practices.

AB 1447, by Assemblyman Mike Feuer, D-Los Angeles, is targeting used car dealers who also finance the cars. “According to the author, the typical business model of so-called ‘buy-here, pay-here’ (BHPH) car dealers is to stock and sell older, high-mileage vehicles to consumers who cannot otherwise qualify for conventional auto loans,” the analysis states.

It sounds as if the car dealers are providing a service to those with bad or no credit.

But because the car dealers “maintain and administer their own sales and lease portfolios, they do not have to comply with underwriting and loan policies set by traditional lenders, and thus are free to set financial terms that are significantly higher than conventional auto loans and leases,” Feuer said the dealers are using unfair and abusive business practices.

Used Car Conundrum

Second, AB 1534 by Assemblyman Mike Wieckowski, D-Los Angeles, also targets used car dealers. It seeks to require used car dealers to disclose the fair market value of the cars for sale.

Both Assemblymen just flunked Free Market 1A.

Wieckowski’s bill states that used car dealers have no requirement for used cars to display a retail price on a window label or sticker. “This disparity, the author contends, allows some unscrupulous used car dealers in California to set the price for a car based on information determined after running the customer’s credit report, or otherwise drastically overprice a used vehicle for low-income consumers who cannot afford a new car but are particularly compelled to obtain a car for everyday needs,” the analysis states.

Third, Sen. Ted W. Lieu, D-Torrance’s SB 956 would, according to his Web site, “Impose first-ever regulations on dealers offering Buy Here, Pay Here installment loans by requiring them to obtain a California Finance Lender’s license, which would provide consumers with an array of protections.

“Limit used-car installment loans to a maximum 17.25 percent interest, which would give California the strongest cap in the nation.”

So basically it’s an anti-usury law. But buyers could be burned if, by being closed out of such a loan, they have to use national credit cards with interest rates up to 29 percent to purchase a vehicle.

Lieu said the bill is needed because “buy-here, pay-here dealers are pushing these types of unregulated loans to sell cars for far beyond market value.”

What’s the problem?

A recent series of stories in the Los Angeles Times about used car dealers precipitated the legislation. But one witness  at Tuesday’s Assembly Judicial Committee hearing testified that he has emails from the author of the Los Angeles Times stories admitting that he did not dig deeply or thoroughly investigate the stories, and that most of the anecdotes did not take place in California.

A representative from the National Independent Automobile Dealers Association said that the the stories were “grossly exaggerated” by the Times.

While there are plenty of stories of shady used car dealers, there already are many legal remedies, and even plenty of hungry lawyers willing to take the cases. The DMV investigates complaints about used cars. The Bureau of Automotive Repairs is a very effective agency which takes on car maintenance issues. The Better Business Bureau is required by law to investigate every complaint. And California has a Lemon Law for warranty and auto dealer complaints.

Bills regulate Auto dealers

Testimony and extreme stories of predatory car dealers who took advantage of enlisted military personnel, immigrants, college students and the working poor were shared by proponents of the bills.

But there was no discussion or defense about why the used car dealers put GPS tracking devices in the cars which they finance, or why they install a devise to disable a vehicle when the purchaser has not made the payments. Some car dealers even require the payments to be made monthly in person.

The cost for high-risk credit is always more expensive. It wasn’t that long ago that people with bad credit had to pay cash for cars. That there is even a credit avenue available for those with bad credit is a breakthrough, and one way to build credit back up.

But these lawmakers want to remove all inconvenience, embarrassment and  risk from the car buyer, and instead put it on the back of the auto dealers, who are performing a service, albeit costly, and with strings attached.

And, instead of seeking legal remedy from unscrupulous used car dealers, Feurer and Wieckowski’s bills would apply to all used car dealers.

Specifically, AB 1447 “seeks to establish a number of basic, common-sense consumer protections for vehicles  purchased or leased from BHPH dealers, including, importantly, a 30-day minimum warranty and restrictions on the use of GPS technology to track a buyer’s whereabouts and the use of  ignition shutdown technology to remotely disable the buyer’s vehicle.”

AB 1534 specifically “would require an automobile dealer to affix a label on any used vehicle being offered for sale that states the ‘reasonable market value’ of that vehicle, defined as the average retail value based on the condition, mileage, year, make, and model of the vehicle as determined within the last 30 days by a nationally recognized pricing guide.”

Free market lost on Legislators

The ensuing discussion about the used car dealers focused solely on the victims–the car purchasers–and not at all on the rights of the business owners or the risk auto dealers take by even allowing car buyers who are credit risks to purchase from them.

Both of these bills seek to take all responsibility out of the hands of the purchasers in order to find fault with the car dealers.

The used car market has always been challenging. But for a responsible, patient person, used cars can be a fantastic deal.

Chances are that the “victims” of these car deals did not do prior research on the used car before stepping on the car lot. Chances are they did not go to the dealer armed with pricing information, maintenance questions, and questions about the car’s history. I am willing to bet that 99 percent of the used car deals at issue were made the same day the purchaser walked onto the used car lot and heard, “I can put you in this car today.”

Car Pricing Is Not a Mystery

AB 1534 would require a sticker on the car listing the “reasonable market value” of the car.

“Why not publish the wholesale purchase price the dealer paid,” asked Assemblyman Roger Dickinsen, D-Sacramento. Dickinsen also flunked Free Market 1A.

The answer is because car dealers purchase a car at a wholesale price, and sell it at a retail price. They are in the business to make a profit. Selling cars is not a free service for the good of the community.

For anyone willing to take just a little time when making a car purchase, Kelly Blue Book is an industry standard for car pricing. It’s easy to find car values. And it doesn’t take a smart phone to do it. Those without computers can go to the public library and use their machines.

Auto Trader is another big used car sales and pricing resource. There is N.A.D.A., the National Auto Dealers Association, Edmunds and Galves.

Preying Upon Our Military

Testimony about the vulnerability of young military enlisted falling prey to car dealers is nothing new. For decades, military men and women have made disastrous auto loans. Barry White, director of the Navy-Marine Corps Relief Society office, told the story of a 20-year-old sailor, a single mother who spent $3,000 on a car that quickly broke down, and couldn’t afford to spend the estimated $3,000 on repairs.

White also told the story of a young male enlistee who made such a bad auto loan deal, that White stepped in to help do a work-out. But the young man wanted the car so badly, he rejected the work-out, and continued to buy the car.

That scenario is the most common of car deals.

Anti-business, Nanny Laws

Wieckowski’s bill does not differentiate between new and used car dealers, and would require that all cars have “reasonable market value” sticker. But for the thousands of cars in many new car lots, together with regularly changing values, this bill poses a real problem.

The California New Car Dealers Association was among several dealer representatives opposed to the bills. “This is a logistical nightmare for dealers that were never identified as part of the problem,” said Mike Belote, a lobbyist for the new car dealers association. Belote said AB 1534 should be amended to apply only to “buy-here, pay-here” car sales.

Feurer’s bill could end up hurting the very people he claims to be protecting by interfering with their ability to purchase cars, even with bad credit.

Each of these bills only serves to save us from ourselves, and is nothing more than more California Nanny legislation.

It’s not difficult to imagine that if those in California with bad credit can no longer purchase a car, their only remaining option is mass transit. Is that the real goal?