The future of California's Buy Here Pay Here used-car industry now rests in the hands of Gov. Jerry Brown.
State lawmakers on Thursday gave final approval to two bills that would apply sweeping new regulations on the dealerships, which sell high-mileage cars to people with damaged credit. They join a third piece of legislation, passed Monday, on the governor's desk in Sacramento.
If signed into law, the bills would impose what is probably the most aggressive and far-reaching set of controls on the Buy Here Pay Here industry in the nation and could set a template for other states.
Unlike traditional car dealerships, Buy Here Pay Here lots arrange their own financing on the cars they sell rather than using third-party lenders such as banks or credit unions. That enables them to sell to customers who would not qualify for conventional loans because of a bad or incomplete credit history.
Critics of the dealerships have accused them of preying on working families, leveraging people's need for transportation to demand high interest rates and large down payments on cars that often have well over 100,000 miles on the odometer.
A measure by state Sen. Ted Lieu (D-Torrance) would limit the interest rate these dealers can charge to 17% plus the federal funds rate, currently at 0.25%. Among other provisions in the bill, SB 956, is a requirement that Buy Here Pay Here dealers register with the state as lenders and give consumers a 15-day grace period before repossessing cars after a missed payment. It passed a concurrence vote early Thursday afternoon, 23-14.
Later in the day, a separate bill, AB 1534, passed its own concurrence vote in the Assembly, 46-27. Written by Assemblyman Bob Wieckowski (D-Fremont), it seeks to require dealers to post a fair-market value on every car on their lots. Sales records show that many cars sold on Buy Here Pay Here lots routinely sell for three or four times book value.
The bill passed Monday, AB 1447, would require the dealers to provide a 30-day, 1,000-mile warranty on their cars and to disclose any devices used to assist repossessions, including GPS trackers.
"I'm very pleased. This is a very important moment," Lieu said. "If these become law, it will cause other states to follow what we've done."
Supporters of the bills include consumer groups and numerous chambers of commerce. During the legislative process, the bills received several amendments strengthening their provisions, including an extension of the grace period before repossession from 10 days as originally proposed.
Brown typically does not telegraph his plans on signing bills, and a spokesman did not return a request for comment on the legislation. Earlier this month, however, the Department of Finance came out in opposition to Lieu's bill on the grounds that it could put many Buy Here Pay Here dealers out of business.
That mirrors the main argument of the legislation's opposition, led by used-car dealer industry groups and a coalition of Buy Here Pay Here dealers. They say the state could lose more than $300 million in sales taxes if dealers have to shut down because complying with the regulations is too expensive.
In addition, Bill Dohring, lobbyist for the Independent Auto Dealers Assn. of California, said the bills would exempt the vast majority of car dealers in the state from the regulations, thanks to a carve-out for new-car dealers adopted during the legislative process. He said that almost all new-car dealers sell used cars, and that many provide in-house financing indistinguishable from Buy Here Pay Here loans.
"If this regulation was really that important, they should have made it apply to all dealers," Dohring said. "There is going to be some fallout from this and I feel bad for the dealers who are going to suffer because of it."
All three bills were introduced early this year following a series of Los Angeles Times articles exploring the business model and practices of the Buy Here Pay Here industry. This spring, the federal Consumer Financial Protection Bureau opened an investigation of DriveTime, one of the nation's largest Buy Here Pay Here chains.
Few states distinguish Buy Here Pay Here lots from more traditional used-car dealerships, and even fewer have rules specific to the unique aspects of the industry. Although it is not known exactly how many such lots operate in California, a Times report this month found that in recent years, more than 800 dealers in the state have engaged in "churning," in which a car is sold, repossessed and sold again, multiple times, to boost profits.
The governor has 30 days to take action on the bills.