California is no stranger to tight regulation of many industries, as the state proudly enjoys its reputation as a driving force of American regulatory trends and industry standards. The latest industry targeted by the state’s legislators is that of the ‘Buy Here, Pay Here’ car dealers. They’re well-known for offering automobile financing to consumers who have less-than-perfect credit, but they’re also well-known for charging exorbitant fees and high interest rates that can actually increase the chances of late or missed payments, as well as costly and credit-killing repossessions.
Three Bills Looking to Curtail Used Vehicle Sales and Exploitative Terms
California’s two state houses of the legislature are consider three extensive bills that they claim will help to protect consumers and regulate freewheeling used car dealers throughout the state. Those bills are SB 956, AB 1447 and AB 1534, all up for debate and discussion this month. Votes on each bill could come as early as August, and the effects of those bills could be felt during the third calendar quarter of the present year.
The main goal of all three bills is to force ‘Buy Here, Pay Here’ car dealers to stop lending to consumers who are seriously unlikely to be able to repay any car loan that they make between themselves and the dealer’s own financing arm. All too often, these used car dealers strike deals with consumers whose credit goes well beyond ‘bad’ and right into the ‘very poor’ territory that involves sub-500 FICO scores and many other outstanding debts on which the consumer must pay while also making car payments.
These three bills would seek to prevent such exploitative and dangerous car loans from being made. They would accomplish this by setting a minimum ‘floor’ for credit scores and outstanding bad debt, requiring ‘Buy Here, Pay Here’ car dealers to turn away bad credit consumers who simply don’t have the means to make consistent, timely payments, and avoid the repossession of their new vehicle.
The three bills moving through the state legislature would also mandate a cap on interest rates, which can reach sky-high levels on some lots that offer dealer financing. Currently, all three bills agree on a mandated interest rate cap of 17.25 percent; that might seem high to some, but it’s just the tip of the iceberg on dealer lots that offer their own financing. Interest rates can often soar into the 20s, 30s, or even 40s, at these exploitative car lots.
Cue the Controversy: Dealers and Some Local Officials Say the Measure is Costly and Unneeded
One of the main sticking points about all three bills currently moving through California’s state legislature is that they’ll actually reduce the amount of sales tax that can be charged at these dealerships. That will directly result in less revenue for local and county governments, leading to program cuts and other harmful spending cuts that could seriously affect an already struggling local population.
It’s estimated that the total tax revenue brought in by used car dealers if these bills passed would decline from just over $460 million annually to a low of roughly $230 million per year with stiffer regulation. Local officials and used car dealers alike have joined together to openly question whether these bills will truly benefit consumers. While it might prevent credit-crunched customers from buying a vehicle they cannot afford, it might also lead to cuts in programs that aid the same customers — namely the state’s public assistance and welfare programs.
Lots of Work to Be Done to Create the ‘Perfect Bill’
Dealers who operate ‘Buy Here, Pay Here’ car lots are understandably frustrated by California’s attempt to regulate their industry. Since they finance buyers themselves, every interest rate percentage point equates to a larger profit when a vehicle is sold at one of these lots. Consumers should view their objections as a business decision, and not necessarily as a referendum on the quality of the bill itself.
Indeed, even local officials in California’s towns and cities are in favor of capping interest rates and increasing credit standards when selling a vehicle to a consumer. Many feel that it will help to eliminate high rates of black market sales and dangerous repossessions, increasing the quality of life throughout the state and increasing the reputation associated with purchasing a used car in California.