Bill would regulate Buy Here Pay Here used-car lots as lenders

Used-car dealers known as Buy Here Pay Here lots would be regulated by the state as lenders under new legislation aimed at curbing what some critics say are abusive and predatory lending practices.

The bill, SB 956, would require Buy Here Pay Here dealers to be regulated by the Department of Corporations as lenders. That’s because, unlike conventional dealerships, they finance car purchases themselves, offering buyers what are essentially installment plans.

“What Buy Here Pay Here dealers are doing is in fact a form of lending” said state Sen. Ted Lieu (D-Torrance), who introduced the bill Monday. “They’ve been able to fly under the radar and not comply with lending laws.”


Lieu’s legislation is the second bill to take aim at Buy Here Pay Here dealerships in response to a Los Angeles Times series last year, which shed light on the little-known corner of the used-car market.

Focusing on customers with bad credit, dealers often charge triple the book value for older used cars and charge interest rates that can top 30%. Some employ a business model that ratchets up profits by repossessing the same car multiple times, reselling it to new customers each time.

A bill introduced last week by Assemblyman Mike Feuer (D-Los Angeles) would require Buy Here Pay Here dealers to display vehicle sales prices and would block dealers from using GPS trackers and devices to prevent the cars from being started.

Under Lieu’s bill, dealers would have to file annual reports to the Department of Corporations, which regulates lenders such as payday loan shops and Wells Fargo & Co. The bill is self-financed, so any additional staff and investigation costs would come from an annual license fee imposed on dealers, Lieu said; the amount has yet to be determined.

Massachusetts, one of the few states that require Buy Here Pay Here dealers to register as lenders, assesses a $1,000 annual licensing fee.

Department of Corporations spokesman Mark Leyes said the agency was aware of the bill but could not comment on it until it had a chance to study it more closely.

Among the bill’s other major provisions is an interest rate cap on the retail installment contracts issued by these dealers, barring them from setting interest rates higher than 17% plus the federal funds rate.

At present, the federal funds rate is 0.25%, meaning the most a Buy Here Pay Here dealer in California could charge on a loan would be 17.25%. By comparison, many dealerships offering their own financing in the Golden State charge 20% to 30% on three- and four-year installment contracts.

In addition, the bill would prohibit dealers from repossessing cars themselves when a customer defaults. Instead, they would be required to hire a state-licensed repo company; they also would be obliged to offer consumers a grace period after repossession in which to pay off outstanding delinquency fees.

Lieu said those rules are aimed at dealers who make repossessions a part of their business model.

Larry Laskowski, executive director of the Independent Automobile Dealers Assn. of California, which represents used-car dealers including Buy Here Pay Here lots, was concerned that new regulations wouldn’t eliminate bad behavior.

“If dealers are doing things they aren’t supposed to be doing, there are already lots of rules written in the law,” said Laskowski, noting that the Department of Motor Vehicles already assesses a fee on dealers to pay for investigations. “By restricting what dealers who attempt to help poor people get loans are doing, you’re making it so these consumers can’t get a car at all.”

A third bill, by Assemblyman Bob Wieckowski (D-Fremont), is expected in coming weeks. That bill will include a provision that would require dealers to post the fair market value of cars on the vehicle itself, a Wieckowski spokesman said, to help consumers get a better sense of whether a car is fairly priced.