AB 2116 Assembly Bill - Bill Analysis BILL ANALYSIS AB 2116 Page 1 Date of Hearing: April 29, 2008 ASSEMBLY COMMITTEE ON JUDICIARY Dave Jones, Chair AB 2116 (Portantino) - As Amended: April 3, 2008 SUBJECT : Automobile Sales: Conditional Contracts KEY ISSUE : When a creditor notifies a defaulting buyer of his or her right to reinstate a conditional automobile sales contract, should that notice set forth precisely what the defaulting buyer must do in order to reinstate the contract and reclaim the vehicle? SYNOPSIS This bill, which is sponsored by the California Bankers Association, seeks to define what information must be provided to a consumer who seeks to reinstate a conditional automobile sales contract. Under existing law, when a person defaults on the sales contract, the lender may repossess the vehicle. However, before selling the repossessed vehicle, the lender must send the buyer a notice of intent (NOI) to sell the vehicle and inform the buyer of his or her right to reinstate the contract by curing any default. Existing law requires that the NOI set forth "all conditions precedent" to reinstatement. A recent court of appeals decision held that "all conditions precedent" means enough information to let the buyer know precisely what he or she must do in order to reinstate the contract, including specific dollar amounts of any fees that must be paid to third parties, such as repossession agents or storage facilities. The Bankers argue that the court upset existing business practices by requiring the lender to provide more information, and with greater specificity, than is always practical. This bill purports to satisfy the "all conditions precedent" requirement by requiring the NOI to include the total amount due - including any amount that may accrue during the reinstatement period - and general statements about other fees or obligations that may be owed, without necessarily specifying dollar amounts or to whom the amounts must be paid. Opponents claim that the recent court ruling appropriately defined "all conditions precedent" to include all information that the buyer needs in order to exercise his or her right to reinstate, including an itemization of all fees owed and to whom AB 2116 Page 2 those must be paid. As noted in the analysis, the opponents raise legitimate concerns and the recent appeals court ruling not unreasonably concluded that, in order to effectuate the intent of the Legislature, "all conditions precedent" must mean sufficient information to enable to buyer to determine what he or she must do to reinstate. Although efforts to reach a compromise on amendments that might be taken in this Committee did not bear fruit, the author, sponsor, and opponents have communicated to the Committee their willingness to continue working toward a mutually satisfactory solution as the bill moves forward. The analysis suggests a number of amendments which might reasonably expand the required contents of the NOI. SUMMARY : Provides that a notice sent to a defaulting vehicle buyer must include specified information relating to reinstatement of a motor vehicles sales contract after the vehicle has been repossessed for nonpayment. Specifically, this bill requires a notice setting forth the conditions precedent necessary to reinstate a conditional sales contract to include all of the following: 1)The total amount required to reinstate the contract as of the date of notice; 2)The amount and due date of any scheduled payments and delinquency fees that may become due to the holder during the initial reinstatement period, if such amounts will increase the amount required to reinstate the contract; 3)Prescribed statements pointing out that other amounts may be due to third parties and that, before reinstatement, the person may be required to demonstrate that he or she is not in default under the insurance or other provisions of the contract. 4)An address and phone number of the holder from which the buyer may obtain more information regarding his or her reinstatement rights. EXISTING LAW: 1)Governs, under the Rees-Levering Conditional Sales Finance Act, conditional sales contracts, as defined. Requires a conditional sales contract to contain certain disclosures, including, the cash price and various required fees. (Civil Code Sections 2981 et seq.) 2)Requires the holder of a repossessed vehicle to provide the AB 2116 Page 3 written notice of intent (NOI) to dispose of a repossessed or surrendered motor vehicle to all persons liable on a conditional sales contract. Requires that content of notice to state, among other things, that there is a conditional right to reinstate the contract until the expiration of 15 days, or an additional 10 days as specified, from the date of giving or mailing the notice. (Civil Code Section 2983.2.) 3)Specifies that the required NOI must state "all conditions precedent" necessary to reinstatement. (Civil Code Section 2983.2) 4)Holds that "all conditions precedent" means sufficient information to enable the buyer to determine precisely what he or she must do to reinstate the conditional sales contract, including stating the amounts due, to whom the amounts are due, and any other specific fees that must be paid or actions taken to reinstate the contract. (Juarez v. Arcadia Financial, Ltd. (2007) 152 Cal. App. 4th 889.) 5)Provides that the defaulting buyer is only liable for any deficiency remaining after the disposition of vehicle if the holder of the vehicle gave the buyer notice with 60 days of repossession and the notice adequately disclosed prescribed information. (Civil Code Section 2983.2(a).) 6)Permits owners of a repossessed vehicle to redeem the vehicle by paying the amount owed in full within 15 day of receiving NOI, unless an extension is granted. (Civil Code Section 2983.2.) FISCAL EFFECT : As currently in print this bill is keyed non-fiscal. COMMENTS : The Rees-Levering Act Conditional Sales Finance Act, first enacted in 1961 and substantially amended in 1976, is a consumer protection measure for automobile buyers who default on their payments. Under existing law, when a person defaults on a conditional automobile sales contract, the creditor may repossess the vehicle and sell it in order to recoup losses. Rees-Levering, however, requires that before selling the repossessed vehicle, the creditor, or other holder of the vehicle, must send the buyer a notice of intent (NOI) to sell the vehicle. The NOI must also inform the buyer of his or her right to redeem the vehicle (by paying the full amount owed) or, AB 2116 Page 4 alternatively, to reinstate the conditional sales contract by curing any default. Clearly, reinstatement is a better option for the buyer than redemption, since reinstatement does not require paying the full amount owed before regaining possession of the vehicle. The Juarez Case . Existing law requires that the NOI set forth "all conditions precedent" to reinstatement, without specifying what "all conditions precedent" might entail. A recent appellate court ruling interpreted this clause and concluded that it requires an NOI to contain sufficient information to enable the buyer to determine precisely what he or she must do to reinstate the conditional sales contract. (Juarez v. Arcadia Financial, Ltd. (2007) 152 Cal. App. 4th 889.) The court held that at a minimum this would require the NOI to state "the amounts due, to whom they are due, the addresses and/or contact information for those parties, and any other specific actions the buyer must take." In particular, the court held that the NOI, if it is to adequately state "all conditions precedent," must also identify the amount of any fees that may be owed to third parties or any other obligations or conditions of the contract beyond the amount owed on the sales price. For example, existing law (Vehicle Code Section 28) requires a repossession agent to notify and file a written report of repossession with a local law enforcement agency. Pursuant to Government Code Sections 26751 and 41612, the person holding the repossessed vehicle can demand that the buyer pay this fee before the vehicle will be released. Other possible conditions precedent may require the buyer to pay fees to the repossession agent or to demonstrate that any contractually required insurance payments have been made. In short, the Juarez ruling concluded that "all" conditions precedent mean "all" conditions precedent, and that all required fees or actions must be detailed in the NOI. This bill would effectively overturn the holding in Juarez, at least insofar as what the court seemed to require of the NOI. Whereas the court opinion seems to require that the NOI specify the specific dollar amount of every fee that might be owed and every action that must be taken, this bill would set out a more modest set of requirements. Specifically, this bill would provide that the requirement to provide all conditions precedent would be met if the NOI included all of the following: (1) The total amount required to reinstate the contract as of the date of the notice; (2) the amount and due date of any scheduled AB 2116 Page 5 payments and delinquency fees that may become due to the holder during the initial reinstatement period; (3) a statement noting that other amounts may be due to third parties, including the repossession agent, in order to obtain possession of the vehicle; (4) a statement noting that the buyer may be required to demonstrate that he or she is not in default under the insurance or other provisions of the contract; and (5) the address and phone number of the holder so that the buyer may obtain more information regarding his or her reinstatement rights. ARGUMENTS IN SUPPORT : According to the sponsor, the Juarez ruling sets out an impractically detailed set of requirements that has never been required under existing law. The sponsor initially sought a review of this decision and made a formal request to the California Supreme Court for depublication. The California Supreme Court denied review and rejected the request for depublication. The sponsor claims, both in its request for review and depublication and in its arguments to the Committee, that the decision ignored long-standing industry practice, which is to provide the buyer with reasonable notice of the "conditions precedent" to reinstating a contract, but not nearly to the degree of specificity required by the court. The sponsor contends that not only is the degree of specificity required by the court impractical, but that the decision means that lenders who have long provided notices that they reasonably assumed met the requirements of the law will now face challenges that those notices are inadequate. Presumably the court's opinion is retroactive, insofar as it declares that it was the Legislature's intent all along that "all conditions precedent" should have this broad meaning. In short, the sponsor fears that this bill will not only impose a new requirement on lenders, but that it will also subject them to litigation over already-issued notices. The author and sponsor contend that this measure will correct the uncertainty created by the Juarez decision and provide a reasonable and uniform standard that will provide lenders with adequate guidance and provide consumers with the information that they will need to reinstate the contract and reclaim possession of their vehicle. ARGUMENTS IN OPPOSITION : Opponents claim that the recent court ruling appropriately defined "all conditions precedent" to include all information that the buyer needs in order to AB 2116 Page 6 exercise his or her right to reinstate, including an itemization of all fees owed and to whom those must be paid. The Consumer Attorneys of California (CAOC) argues that the most reasonable interpretation of "all conditions precedent" is that "it requires creditors to provide enough information to allow buyers to determine precisely what they must do in order to reinstate their contracts." CAOC claims that, as currently drafted, this bill provides much less than what is required, claiming that the bill requires only two pieces of information: (1) the total amount required to reinstate as of the date of notice; and (2) the amounts and due dates of any payment that may become due during the reinstatement period. CAOC claims that all other conditions would be left off the notice. In fact, however it appears that the notice currently prescribed in the bill would also require the holder to inform the consumer that there may be other amounts owed to third parties, including repossession agents; inform the consumer that he or she may be required to demonstrate proof of not being in default of insurance or other provisions of the contract; and to provide the phone number and address of the holder so that the consumer can obtain more information regarding his or her reinstatement rights. Consumers for Auto Reliability and Safety (CARS) make substantially similar arguments. In short, both CAOC and CARS would prefer that the NOI include all or most of the pieces of information highlighted in Juarez. That is, where this bill would only require the NOI to specify the dollar amounts for the amount owed to reinstate the contract, CAOC and CARS apparently prefer specific dollar amounts for all other fees, such as repossession agent fees, storage fees, and required law enforcement fees. The author reports that he and the sponsor have been in discussions with the opponents in an effort to reach a compromise on amendments. These negotiations did not come to fruition prior to the hearing in this Committee, but all parties have communicated to the Committee their willingness to continue working toward a mutually satisfactory solution as the bill moves forward. In that spirit, t he Committee may wish to encourage the author to take amendments that will enhance the NOI requirements so that a consumer will have a fuller understanding of what he or she must do in order to reinstate the contract and regain possession of the vehicle. At a minimum, a relatively short notice form could include the following items, in addition to those items already required in AB 2116 Page 7 the bill: A statement informing the buyer that he or she will be required to pay a $15 law enforcement fee and to whom that must be paid. (Note: Sometimes this fee is paid by the buyer directly to the law enforcement agency and proof of payment must be presented to the storage yard before obtaining possession of the vehicle. Other times the lender or repossession agent may pay this fee and collect it from the buyer. In either case, the lender could inform the buyer of the fee and to whom it should be paid.) A statement informing the buyer about any storage fees that must be paid and to whom they must be paid. To the extent that storage rates and amounts owed are known by the lender, then the amounts should be included in the notice as well. The notice should also include the address and other contact information for the storage facility. (Note: Lenders claim that they do not always know how much is owed to the storage company; however, given that they select the storage company, they should know the contact information and they should generally know the rates charged, if not the exact amounts.) If the lender knows the amount owed to the repossession agent, then this amount shall be included in the NOI and the contact information for the repossession agent shall be provided. (Note: Again, given that the lender presumably selects the repossession agent, the lender should know the contact information and the general rates charged, if not the exact dollar amount owed in every particular case.) To the extent that they are known by the lender, the NOI should also include the address and contact numbers of any third parties to whom a fee is owed. REGISTERED SUPPORT / OPPOSITION : Support California Bankers Association (sponsor) California Credit Union League Opposition AB 2116 Page 8 Consumer Attorneys of California Consumers for Auto Reliability and Safety (CARS) Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334