New Law Seen Halting Auto Subleasing Abuses

A new state law that was sparked by an Orange County case should put an end to widespread abuses in the automobile subleasing business, a lawyer with the state Department of Consumer Affairs said Monday.

The new measure, which takes effect Jan. 1, makes it a crime to sublease cars without the consent of the original lessor or lender and has the practical effect of making it impossible or unprofitable to sublease cars legally, according to John C. Lamb, staff attorney with the Consumer Affairs Department.

“We think the law will halt the proliferation of these business and will eliminate the existing auto subleasing operations,” he said.

“At least $50 million worth of leased autos may be involved in subleasing. These cars represent the lessors’ security, and they don’t know where the cars are.”

Lamb estimated that more than 50 subleasing outfits operate from Sacramento to San Diego. Prosecutors in some counties have filed civil lawsuits to close some of the firms down.

Subleasing firms generally charge a fee to find a new lessee for an auto that the original owner can no longer afford.

The move toward a clear-cut law to regulate the business arose from a Legal Aid Society case against National Security Financial Services.

The Anaheim subleasing firm had collected an estimated $400,000 in non-refundable service fees for arranging subleases for about 400 customers before it folded in April, 1985, after six months of operations, according to the Legal Aid suit.

In many cases, the suit alleged, money from the auto subleases was not forwarded to the lender, leaving the original purchasers or lessees in default.

National spawned imitators statewide. Prosecutors in San Francisco, Sacramento and Contra Costa counties are trying to put four such firms out of business through civil litigation.

In the National case, Eustace T. Strickland, who succeeded James Trawick II as president of the company, was arrested last year and charged by the Los Angeles city attorney’s office with tax evasion on allegations of having failing to file a state income tax return for 1985.

Trial to Start Wednesday

City prosecutors also charged Strickland in February with grand theft, false advertising and violations of other state laws in allegations of promising to sell leased cars that he had no authority to sell.

Strickland’s trial is scheduled to start Wednesday. Trawick dropped out of sight and hasn’t been seen since he and Strickland were sued by Legal Aid, according to attorneys for the publicly funded law firm for the indigent.

Operators of subleasing firms said they provide a service by taking over car and insurance payments from those who no longer can afford them--thus protecting their credit ratings. The companies then sublease the cars to those who cannot otherwise lease or buy automobiles because they’ve never established credit or have bad ratings.

While it is a cash-rich and unregulated business, subleasing companies do not usually remain in business for more than six months or so, said prosecutors and investigators for bank leasing companies and the Legal Aid Society.

But prosecutors throughout California said many subleasing companies have failed to make the payments that are owed to the original lenders--often banks.

Those lenders, they said, have generally not been told that the cars they financed are being subleased and are no longer operated by the original borrowers.

Two Sets of Victims

Thus, the prosecutors said, when a subleasing company pulls up stakes, it often leaves two sets of victims behind: those who relinquished possession of their cars, only to find themselves with thousands of dollars in past-due payments, and those who made hefty down payments to sublease cars that were then repossessed.

Legal Aid lawyers and bank officials have acknowledged that banks and leasing companies may have created the need for subleasing primarily because of lax credit checking and onerous prepayment penalties required for returning automobiles before the lease term expires.

Under the new law, prosecutors have the choice of alleging a felony or a misdemeanor, but the maximum penalty is the same: a year in prison and a $10,000 fine.

The new law also creates civil liability so that victims of subleasing scams can sue and collect not only damages but attorney fees as well.

Lamb said he believes the law will effectively end the subleasing business, because standard lease contracts and most loan agreements prohibit subleasing.

And if a bank or other lender waives the clause and recognizes a sublease agreement, he said, the costs of doing business would be so high that no one could make any money at it.