The California legislature, inspired by newspaper articles alleging abuses by a few BHPH dealers and that were based on anecdotes, has passed three bills aimed at BHPH dealers.  Two of the bills will do enormous damage to the BHPH industry in the Golden State (which probably seems a bit less golden to the dealers who will be driven out of business by the new measures).

Let’s start with the bill that is the least problematic.

Assembly Bill 1534 seems designed to call the buyer’s attention to the fact that buy-here-pay-here dealers charge high prices for the vehicles they sell.

The bill defines the term buy-here-pay-here dealer as an automobile seller who enters into conditional sales contracts or lease contracts and assigns fewer than 90 percent of those obligations to unaffiliated third-party finance or leasing sources within 45 days of consummation of those contracts.  You aren’t a buy-here-pay-here dealer, however, if you primarily lease vehicles that are two model years old or newer, or if you “certify” 100 percent of your vehicles under a particular section of the California Code and have a licensed on-site service and repair facility employing at least five master technicians certified by the National Institute for Automotive Service Excellence. Got all that?

A buy-here, pay-here dealer must prominently and conspicuously display a label on any used vehicle offered for retail sale that states the vehicle’s reasonable market value.  The label must contain specified information used to determine the reasonable market value and the date the value was determined.  The buy-here-pay-here dealer must provide to a prospective buyer of the used vehicle a copy of any information obtained from a nationally recognized pricing guide that the buy-here pay-here dealer used to determine the reasonable market value.

So if you are subject to AB 1534, you post a required notice on your vehicles.  Your customers have a very limited number of places that will sell them vehicles on credit, so even if they pay attention to the required disclosure, they will likely ignore it so that they can ride instead of walk.  You’ll have the added trouble and expense of making a disclosure that your customers won’t pay any attention to, and you go on about your business.

Senate Bill 956 would enact the Buy-Here-Pay-Here Automobile Dealers Act.  The bill would define a “buy-here-pay-here” dealer in the same way that AB 1534 does  This bill requires those dealers to obtain a finance lender license and subjects them to specified other provisions of the California Finance Lenders Law.  The bill defines a “buyer-borrower” as a person who enters into a conditional sale contract or lease contract with a buy-here-pay-here dealer.  The bill provides that the Department of Corporations would have regulatory jurisdiction over specified lending and repossessing activities of buy-here-pay-here dealers.

This bill governs the terms and conditions of contracts entered into by a buy-here-pay-here  dealer and the rights of the parties, including, but not limited to, requiring a notice to the buyer of specified rights under the contract.

This bill imposes additional requirements on a buy-here-pay-here dealer seeking to repossess a vehicle, including prohibiting the dealer from commencing repossession proceedings for failure to make a scheduled payment prior to the 16th day following the day on which that payment was due, requiring the dealer to hire a licensed repossession agency to repossess the vehicle on the dealer’s behalf, and prohibiting the dealer from charging the buyer more than $500 for the dealer’s repossession costs.  The bill also caps interest rates that could be charged under a conditional sale or lease contract (which is interesting, because leases do not employ interest rates) and requires a buy-here-pay-here dealer to allow a buyer 45 days to repay any penalties, fees, and other charges imposed by the dealer for past due payments that have been brought current.

Assembly Bill 1447 requires a buy-here-pay-here dealer (defined as in SB 956 and AB 1534) 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.  The warranty must cover a large number of designated parts, well beyond the “engine and drive train” warranties often offered.  The bill requires the dealer to either repair covered parts that fail or, at the dealer’s election, to cancel the sale or lease and reimburse the buyer or lessee.  The bill requires the dealer to pay 100 percent of the cost of labor and parts for any warranty repairs.  The bill voids any agreement for the purchase or lease of a vehicle that waives, limits, or disclaims these requirements, and provides that a warranty is deemed to have been issued if a buy-here-pay-here dealer fails to issue one as required.  The bill prohibits a buy-here-pay-here dealer from requiring the buyer to make payments in person (other than the downpayment), would prohibit the dealer from repossessing the vehicle or charging a penalty following timely payment of a deferred downpayment, and would prohibit the dealer from tracking the vehicle using GPS technology or from disabling the vehicle with starter interrupt technology, except with the buyer’s permission and subject to other specified protections for the buyer.

AB 1447 and AB 1534 were signed by the governor on September 29, and SB 956 was vetoed by the governor on the same day.  The governor’s veto can be overridden by a two-thirds’ vote in both houses. AB 1534, by itself, would be a nuisance by increasing dealer overhead and providing no benefit to consumers. However, together, AB 1447, AB 1534 and SB 956 (should the governor’s veto be overridden) would dramatically alter the California buy-here-pay-here landscape. California dealers will engage in a mad scramble with their lawyers to determine whether they can reconfigure their businesses so as to fall within one or more of the exemptions, but how many buy-here-pay-here dealers will be able to employ five or more certified mechanics on site or limit themselves primarily to leasing vehicles that are two model years old or newer?

Those dealers who are unable to escape the definition of a buy-here-pay-here dealer will face interest rate caps, fee caps, disclosure requirements, warranty obligations, repossession limitations and other requirements that will impose significant compliance burdens and costs that smaller operators are unlikely to be able to meet.  You can expect a wave of dealers exiting the buy-here-pay-here business or consolidating their operations to create businesses with sufficient resources to meet these new demands.

These bills represent a low point for the California legislature, which missed an opportunity to do something good for its citizens and for California’s honest and reputable buy-here-pay-here dealers.  Rather than taking as gospel the newspaper’s allegations that the bad acts of a few dealers were representative of the industry as a whole, without doing anything to determine whether the bad acts were pervasive, the lawmakers instead could have actually, you know, spent some time studying the businesses they wanted to regulate, identifying best practices of the honest and reputable operators, and fashioning a law that reflected those best practices.  That might have taken a bit more time, but at the end of the day, such an approach would have resulted in prohibitions that applied to the bad actors, and not to the large majority of the dealers who are doing it right.

But evidently that sort of approach doesn’t get you re-elected.


About the author
Tom Hudson

Tom Hudson


Thomas B. Hudson Esq. was a founding partner of Hudson Cook LLP and is now of counsel in the firm’s Maryland office. He is the CEO of LLC and a frequent speaker and writer on a variety of consumer credit topics.

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