By Dave Roberts

For California’s Democratic legislators to take on used car salesmen is to grab the lowest of low-hanging fruit. The American people’s low opinion of the ethics and honesty of car salesmen is exceeded only by their contempt for members of Congress and lobbyists.

Forty-nine percent of respondents in the latest annual Gallup survey on honesty and ethics ranked car salesmen as low or very low in that regard. Only 7 percent ranked them high or very high. Fifty-seven percent rated Congressmen as ethically low/very low, while 61 percent pegged lobbyists as the sleaziest.

Three bills cracking down on used car dealers — particularly those that provide financing on the spot, known as “buy here, pay here” — are making their way through the Legislature. Like much liberal legislation, it likely will end up hurting the people it’s designed to help. But that apparently is not a concern for those like Sen. Ted Lieu, D-Torrance, who introduced SB 956 on the Senate floor on May 31, where it passed easily, 24-12.

“These dealers take advantage of our laws to prey on desperate workers, low-income families and our military service men and women,” said Lieu. “These dealers target people who need cars to get to work and manage the daily necessities of life, but cannot qualify for a conventional car loan. They lure these people in, but when the person cannot pay cash, they finance cars at interest rates of 30 percent and mark up aging cars by over 200 percent.”

Lieu told the Senate Judiciary Committee on April 24, “The customer typically has to come and pay in person each month at the dealership. And if they cannot, then the dealer will repossess the vehicle. This business model allows dealers to keep large down payments and cash installments and then resell the vehicle to other unsuspecting buyers.”

Complaints

Buy-here, pay-here used car lots “are one of the most prominent areas in which we receive complaints” on a consumer hotline, Joe Ridout, consumer services manager with Consumer Action, told the committee. Many car buyers complain about being overcharged, he said. A Los Angeles man paid $9,000 for a car with a blue book value of $2,455. Victor from San Francisco paid $18,000 for an $8,400 vehicle. Simone from San Jose paid $32,000 for a car worth $21,000.

“We also hear numerous complaints about interest rates that are deceptively presented to consumers,” said Ridout. “They wind up paying 24, 28, as high as 30 percent, we’ve heard, for used car financing with people with poor credit. We represent consumers that are low income, under-represented in terms of being limited English speaking or otherwise disadvantaged in the marketplace. We feel the interest rate cap is very important, so that these individuals can start building wealth and avoid being ripped off.”

The used car dealer horror stories continued with Rosemary Shahan, president of Consumers for Auto Reliability and Safety, who said, “For 30 years we’ve heard complaints about consumers who have been taken in by buy-here, pay-here car dealers. We believe that this targets some of the worst practices that occur in auto sales. It will benefit consumers in a number of ways.”

The bill limits the interest rate on buy-here, pay-here loans to no more than 17 percent plus the federal funds rate. Like the minimum wage, which kicks the least skilled off of the bottom of the employment ladder, imposing a maximum loan rate would likely eliminate the bigger credit risks from receiving any loan at all, according to opponents of SB 956. But Shahan believes that possibility is overblown.

‘Less risk’

“It’s important to keep in mind that although the industry says that the rates reflect the risk involved, there actually is a lot less risk for them than they often represent,” she said. “Because it’s a securitized loan; it’s secured by the car. And a lot of times consumers are paying a down payment that exceeds the value of the car. So even if the dealer doesn’t get a single payment, they still come out ahead.”

She touted the bill’s requirement that a dealer must wait at least 11 days after a missed payment before repossessing the vehicle. And she likes the provision allowing an extra 45 days to pay any late payment fees.

The bill will help borrowers avoid “the worst case scenario [wherein] they buy the car to get to work — and they end up with more debt, no car, worse credit and a repo that stays on their record for seven years,” said Shahan.

SB 956 was approved 7-2 by the Banking and Finance Committee on June 25.

Another anti-lemon bill is AB 1447, by Assemblyman Mike Feuer, D-Los Angeles, which was approved 49-25 in the Assembly on May 29. Like the other two bills, it’s spurred by a three-part investigative series on used car dealers in the Los Angeles Times last fall.

The bill requires a minimum warranty of 30 days or a thousand miles on all vehicles “so the car won’t break down as soon as it leaves the lot,” said Feuer. Another provision is “the customer needs to in writing consent to the GPS tracking and be apprised of the fact that the car could be turned off remotely but be warned by the system before that happens so the customer can be in a safe location. The legislation also requires that no longer can the seller require that a payment be made in person every time a payment is due.”

Also approved on May 29, but by a narrower 42-32 margin, was AB 1534 by Bob Wieckowski, D-Fremont. It requires buy-here, pay-here dealers to place a sticker on every vehicle listing its “reasonable market value.” That is defined as the average retail value based on the condition, mileage, year, make and model of the vehicle as determined within the last 60 days by a nationally recognized pricing guide.

Fighting back

Naturally, used car dealers are fighting back, arguing that the bills will hurt legitimate dealers, cash-strapped and credit-risky people needing their own transportation, the economy and sales tax revenue.

CarMax Auto Superstores released a statement that Wieckowski’s sticker plan would result in misinformation for the consumer: “As a vehicle sits on a dealer’s lot, it depreciates. Thus the ‘reasonable market value’ on the sticker will likely be superficially higher than the actual value of the vehicle.”

The National Independent Automobile Dealers Association opposes SB 956, stating, “Limiting interest rates buy-here, pay-here lenders can charge … will cause those who provide this highly specialized financial service to deep sub-prime auto buyers to discontinue in the line of businesses, which will in turn cause a dramatic decrease in sales tax revenues for the state, county and municipal budgets.” Sales tax revenue could drop $234-$337 million in California, according to the association.

An ad hoc group of used car dealers, chambers of commerce and auto associations, calling itself The Coalition to Protect our Freedom to Drive, has formed to fight the legislation. (New car dealers have chosen to sit out this fight, according to the Los Angeles Times).

Attack on freedom

The legislation “will negatively impact the freedom of all citizens to access vehicles by damaging the only businesses that lend to low-income, blue collar, seasonal workers and credit-challenged Californians,” the group states on its website. “Our Coalition believes that all Californians should have access to the credit they need from private businesses willing to lend to them — this freedom should not be reserved exclusively for the most affluent.”

It predicts that the legislation will result in a 50-90 percent decrease in sales at California’s more than 7,000 car dealerships that cater to low-income, high credit-risk consumers. There are more than 9,000 used car dealers overall in the state. Used car sales totaled more than $5 billion last year, generating nearly $468 million in sales tax, according to the Board of Equalization.

“These three bills are a knee-jerk reaction to sensationalized LA Times articles that were unfounded and biased about the buy-here, pay-here industry,” the coalition states. “Limiting access buy-here, pay-here consumers have to alternative credit sources will force them to meet their transportation needs through unlicensed private party sellers or curb stoners who have little or no interest in consumer protection, vehicle safety, title and registration reporting or paying necessary sales tax and fees. Reducing options will make it more difficult for people with less-than-perfect credit to get to their jobs, schools and doctor’s appointments.”

And, the coalition adds, the legislation can hurt residents in the three out of five California cities that rely “on sales taxes for their already depleted general fund budgets to pay for public safety services such as police and fire protection.”

The coalition is asking that the bills be tabled until a study can be conducted on the impacts of the legislation on dealers, consumers and state and local governments. The study could take one-to-three years. It remains to be seen whether the bills’ authors will view this as a legitimate option worth pursuing, or just a delaying tactic. Smart money is on the latter.

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?