The end of January is the beginning of tax season at Chat Auto Sales in Sacramento, the state capital of California, and Khalid Latif is preparing for a spike in sales. Latif has been the manager of the buy here, pay here (BHPH) dealership since it opened four years ago. He knows the annual flood of tax returns can double Chat’s average of 20 units sold per month.
This year could be different. On January 1, two new laws took effect statewide. The first requires BHPH dealers to offer each customer a minimum 30-day, 1,000-mile warranty, among other measures. The second requires them to display the fair market value of each vehicle, as determined by a nationally recognized guidebook, such as Kelly Blue Book, on a window sticker. A third bill, vetoed by Gov. Jerry Brown, would have enforced a maximum interest rate of 17.25 percent.
Latif says he understands the laws were written to protect his customers. They are typically low wage earners, have poor credit scores and can’t qualify for an auto loan from a bank or finance company. But the warranty is driving up his reconditioning costs, and the window stickers aren’t helping buyers make better decisions.
“It confuses people,” he says. “‘Why are you selling it for $9,000 if it’s worth $13,000?’ Or it’s worth $4,999, according to KBB, but we did work on it. And something that’s warrantied should cost more.”
Ultimately, Latif fears, many customers will be priced out of the market. It’s a concern shared by dealers and dealer associations in California and around the nation.
Opposition and Exemptions
A few miles north of Sacramento, in Roseville, Calif., Larry Laskowski is finishing his workweek. As executive director of the California Independent Automobile Dealers Association (IADAC), Laskowski fought a yearlong battle to derail the new laws.
He says the whole thing started in October 2011, when Ken Bensinger, a reporter for the Los Angeles Times penned a three-part exposé on California’s BHPH industry. The series featured several car buyers who felt victimized by dealers. Each had been burdened by a high-interest deal. Some of their vehicles broke down; others were repossessed. Few readers could fail to sympathize.
The articles were widely read. State lawmakers took notice. Within months, veteran Assembly Member Mike Feuer (D-Los Angeles) had introduced AB 1447. Along with the warranty requirement, the bill would prevent dealers from requiring customers to pay in person and obligate them to disclose the presence of a GPS locator or starter interrupt device. The first draft would have banned them outright.
Feuer was joined by State Sen. Ted W. Lieu (D-Torrance), who introduced SB 956, a measure that would have enforced a maximum interest rate of 17.25 percent. Finally, Assembly Member Bob Wiechowski (D-Fremont) submitted AB 1534, which added the window sticker requirement.
Laskowski says the opposition mobilized quickly. With support from the National Independent Automobile Dealers Association (NIADA), the National Alliance of Buy Here, Pay Here Dealers (NABD) and the Payment Assurance Technology Association (PATA), he began rallying dealers around the state and meeting with lawmakers. They scored an early victory on AB 1447.
“We worked with Feuer to drop the ban on GPS,” Laskowski says. “We met with the PATA. With their help, he wisely pulled that out.”
All summer, dealers and business owners from California and beyond joined the newly formed Coalition to Protect Our Freedom to Drive, which sponsored an online petition against the bills. Among them was Gus Camacho, owner of Camacho Auto Sales, a five-rooftop operation headquartered in Lancaster, Calif., in northern Los Angeles County.
Camacho became one of the most vocal opponents of the new regulations. He helped recruit other dealers to the cause and invested time and money to help build the opposition’s case. “When we were doing our research, we found there weren’t enough consumer complaints to justify the new laws,” he says.
Frank Blair is the owner of Valley Auto Center, also located in Lancaster. He joined the fight despite the fact that his dealership wouldn’t be affected by the new rules.
“I’ve been a car dealer since 1974,” Blair says. “I’m not buy here, pay here, but I signed because I don’t think California should discriminate between dealers.” He points out that CarMax, the multimillion-dollar retail chain, successfully lobbied for an exemption for stores that employ at least five ASE-certified Master Technicians.
Blair says that’s an impossible standard for a small operation, and Camacho agrees. But after the bills passed, he grudgingly decided to take advantage of the exemption. He launched an internal program to guide his mechanics through the lengthy — and expensive — process of achieving Master Technician status.
“The typical buy here, pay here dealer would not be able to afford having five Master Technicians,” Camacho says. “Even though this language was added early, I was still very much against it. We were small at one time. It took a lot of years to grow.”
Blair adds that he doesn’t believe the California Department of Motor Vehicles (DMV), which is tasked with spot-checking dealerships for the window stickers required by AB 1534, is up to the challenge.
“The DMV will have an impossible time enforcing the deal,” he says. “The people whom the legislation was supposed to help are being hurt.”
Value vs. Price
Laskowski says the main reason the window stickers won’t help is that used-car values have been inflated since the onset of the Great Recession. “The valuations available are wildly inaccurate for vehicles in the $8,000 to $9,000 range,” he says. “We just haven’t been able to catch up on inventory since the housing bubble burst.”
At Chat Auto Sales, Latif is already feeling the squeeze. He’s a regular at Brasher’s Sacramento Auto Auction, where he estimates new-car dealers outnumber BHPH dealers by a three-to-one margin.
“The guys with bank financing can outbid us,” he says. “They’re excluded from the law. They can charge whatever they want. They don’t have to put the ‘fair value’ on the window.”
In his meetings with lawmakers, Laskowski says he tried to make it clear that it was California’s independent dealers, not their customers, that were being discriminated against. But the momentum was against him.
“It’s clear the articles in the Times were the reason for the legislation,” he says. “I told them I had an e-mail from Bensinger indicating his articles and the research were not completely balanced. They didn’t want to hear it.”
As the summer wore on, each of the three bills made their way through the legislature and on to Gov. Brown’s office. Shortly before the Oct. 1 deadline, he made his decision: yes on AB 1447 and 1534; no on SB 956. Dealers had dodged the interest-rate cap, but the warranties and window stickers would be required as of January 1.
Laskowski said it didn’t take long for the new rules to affect the industry. “We’re just barely a month into [the enforcement period]. I know for a fact that some dealers have stopped using that business model, changed their signs, rebranded.”
For dealers exiting the segment, it’s the end of an era. For credit-challenged car buyers, it’s fewer options and, ultimately, higher prices.
“It’s too bad for consumers,” Laskowski says. “It’s just going to make it tougher to get cars.”
Editor's Note: This article was originally published in the March 2013 issue of Auto Dealer Monthly.