Investigators throughout California are moving to stamp out an alleged auto-subleasing scheme that has spread into several major cities since getting its start in Anaheim, The Times has learned.
The Anaheim company--which folded last year--spawned at least two dozen imitators. And the operations of those companies have become the focus of stepped-up civil and criminal investigations in Orange, San Diego and several Bay Area counties.
Additionally, the Legal Aid Society of Orange County, representing a victim of the Anaheim firm's scheme, has filed a civil suit aimed at banning the so-far unregulated auto-subleasing business throughout the state.
Operators of such businesses claim they provide a service by taking over car and insurance payments from those who no longer can afford them--thus protecting the original owners' credit ratings--and subleasing the cars to those who cannot otherwise lease or buy automobiles because they've never established credit or have bad ratings.
It is a cash-rich business, but companies that are in it usually don't stay around for more than six months or so, investigators claim. And the payments that are supposed to be made to banks and other original lenders--who generally are not told that the car is being subleased--often are not made, according to a number of law enforcement officials and bankers.
The defunct Anaheim firm was National Security Financial Services, which opened three branches in Los Angeles and Orange counties in six months of operation and collected an estimated $400,000 in non-refundable service fees and monthly sublease payments--most made in cash. The disposition of the money--collected from about 400 customers--is one of the issues in the lawsuit brought by the county's Legal Aid Society.
With complaints about National's failure to pass car payments to the original lenders mounting and with more and more of its customers' cars being repossessed, the company closed its doors last April. Its president, James Trawick II, dropped out of sight.
But another executive, E.T. Strickland, started a similar operation in Los Angeles. And other former salesmen spread throughout the state to start their own subleasing firms.
"The difficulty is that if you can shut them down, you find that they open up down the street or in other states," said Marvin Benowitz, a Security Pacific National Bank vice president. "It seems to me that you've got to get on the record that it's inhospitable in California for this kind of business to exist."
That is exactly what the Legal Aid suit against National Security, Trawick, Strickland and other National employees is trying to do.
Might Seek Legislation
And the California Bankers Assn., which considers the suit to be the lead case in the state, might seek legislation to regulate or outlaw the subleasing business if the Orange County action doesn't succeed, according to Blair Reynolds, CBA's vice president and general counsel.
On March 10, Orange County Superior Court Judge Judith M. Ryan ruled that Trawick, Strickland and their agents can no longer sublease cars unless they first get the approval of banks and other lenders who hold the original leases or liens. The ruling is to remain in force until a trial is held on the merits of the Legal Aid suit.
And bankers say their lending officers are unlikely to give such operations permission to sublease the cars that they have financed, meaning National Security's imitators may soon have to find other lines of work.
Additionally, the San Diego district attorney's office is investigating two subleasing companies and a towing company in that county and reportedly may bring criminal charges against some of the principals by the end of next month. In the San Francisco Bay Area, the state Department of Motor Vehicles is looking into several subleasing operations.
"It's becoming more and more of a problem," said John Parino, a DMV supervising investigator in Sacramento.
The pitfalls for consumers are numerous, according to bankers, lawyers and government officials.
Responsible for Payments
Those who turn over their cars to subleasing companies remain on the hook for any missed payments to the original lender. And, as the registered owners, they could find themselves liable for parking tickets and even civil damages arising from car accidents when subleasing companies fail to get insurance.
They also could face lawsuits by their banks or leasing companies for breaching standard clauses in lease and loan contracts that forbid them from transferring possession of the cars.
Those who rent from the subleasing companies can find their cars repossessed if the subleasing company doesn't pass payments on to the original lender--as was the case with National Security. They also can lose "down payments" of $500 to $5,000 or more, which they paid to the subleasing companies just to get into the cars.