BILL ANALYSIS                                                                                                                                                                                                    




                                                                  SB 95
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          Date of Hearing:   June 30, 2009

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                     SB 95 (Corbett) - As Amended:  May 28, 2009

                              As Proposed to be Amended

           SENATE VOTE  :   21-17
           
          SUBJECT  :   California Car Buyers' Protection Act of 2009

           KEY ISSUE  :  SHOULD CONSUMERS RECEIVE BETTER PROTECTION AGAINST  
          UNSCRUPULOUS AUTO DEALERS WHO FAIL TO SATISFY OUTSTANDING LIENS  
          ON TRADE-IN VEHICLES?

           FISCAL EFFECT  :  As currently in print this bill is keyed fiscal.

                                      SYNOPSIS
          
          This bill is designed to improve consumer protection when  
          dealers receive trade-in vehicles.  According to the sponsor,  
          Consumers for Auto Reliability and Safety (CARS), unscrupulous  
          dealers have increasingly failed to satisfy the outstanding loan  
          on trade-in vehicles, making consumers responsible for loan on  
          the traded-in vehicle, in addition to the new car loan.  Many of  
          these dealers apparently have or are about to go out of  
          business, leaving consumers with little recourse.  As proposed  
          to be amended, the bill reflects consensus reached between  
          supporters and the new car dealers association, which had  
          previously been opposed to the bill.  The proposed amendments  
          provide a means by which dealers must pay the prior credit or  
          lease balance owing on the vehicle or tender the amount  
          necessary to discharge the prior credit or lease balance within  
          21 calendar days.  Dealers would be prohibited from selling or  
          transferring any ownership interest in the vehicle until they  
          have complied with this obligation.  As proposed to be amended,  
          it is believed that all opposition has been removed.

           SUMMARY  :  Enacts the California Car Buyer' Protection Act of  
          2009.  Specifically,  this bill  : 

          1)Increases the fee for a license issued to dealers and  
            lessor-retailers by $25 for the original license, or an  
            ownership change which requires a new application and for the  









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            annual renewal of a license, and the fee for an autobroker's  
            endorsement to a dealer's license and annual renewals by $50.

          2)Provide that it is the intent of the Legislature by increasing  
            the fee for the annual renewal of the license of a dealer and  
            of a lessor-retailer by $25 that $40 of the total fee shall,  
            when appropriated, be utilized by the Department of Motor  
            Vehicles for the investigation of those dealers and  
            lessor-retailers who demonstrate the greatest potential for  
            causing losses to consumers as shown by repeated consumer  
            complaints, habitual violations of the requirements of their  
            licenses, the issuance of a probationary license by the  
            department, or a violation of other standards and criteria  
            established by the department for these purposes.

          3)Provides that when a dealer purchases or obtains a vehicle in  
            trade in a retail sale or lease transaction and the vehicle is  
            subject to a prior credit or lease balance, all of the  
            following apply:

             a)   If the dealer agreed to pay a specified amount on the  
               prior credit or lease balance owing on the vehicle  
               purchased or obtained in trade, and the agreement to pay  
               the specified amount is contained in a written agreement  
               documenting the transaction, the dealer shall tender the  
               agreed upon amount as provided in the written agreement to  
               the lessor registered in accordance with Section 4453.5, or  
               to the legal owner reflected on the ownership certificate,  
               or to the designee of that lessor or legal owner of the  
               vehicle purchased or obtained in trade within 21 calendar  
               days of purchasing or obtaining the vehicle in trade.  This  
               time period may be shortened if the dealer and consumer  
               agree, in writing, to a shorter time period.

             b)   If the dealer did not set forth an agreement regarding  
               payment of a prior credit or lease balance owed on the  
               vehicle purchased or obtained in trade, in a written  
               agreement documenting the transaction, the dealer shall  
               tender to the lessor registered in accordance with Section  
               4453.5, or to the legal owner reflected on the ownership  
               certificate, or to the designee of that lessor or legal  
               owner of the vehicle purchased or obtained in trade, an  
               amount necessary to discharge the prior credit or lease  
               balance owing on the vehicle purchased or obtained in trade  
               within 21 calendar days of purchasing or obtaining the  









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               vehicle in trade.  This time period may be shortened if the  
               dealer and consumer agree, in writing, to a shorter time  
               period.

             c)   A dealer shall not sell, consign for sale, or transfer  
               any ownership interest in the vehicle purchased or obtained  
               in trade until an amount necessary to discharge the prior  
               credit or lease balance owing on the vehicle has been  
               tendered to the lessor registered in accordance with  
               Section 4453.5, or to the legal owner reflected on the  
               ownership certificate, or to the designee of that lessor or  
               legal owner of the vehicle purchased or obtained in trade.

          4)Provides that a dealer does not violate the foregoing section  
            if the dealer reasonably and in good faith gives notice of  
            rescission of the contract promptly, but no later than 21 days  
            after the date on which the vehicle was purchased or obtained  
            in trade, and the contract is thereafter rescinded on any of  
            the grounds in Section 1689 of the Civil Code.

           EXISTING LAW  :

          1)Provides that before any dealer's or remanufacturer's license  
            is issued or renewed by the DMV to any applicant, the  
            applicant must procure and file with the DMV a bond executed  
            by an admitted surety insurer, approved as to form by the  
            Attorney General, and with the condition that the applicant is  
            prohibited from practicing any fraud or making any fraudulent  
            representation that would cause a monetary loss to a  
            purchaser, seller, financing agency, or governmental agency.   
            (Vehicle Code (VC) section 11710(a).)

          2)Provides that a dealer's bond must be in the amount of  
            $50,000, except the bond of a dealer exclusively in  
            motorcycles or all-terrain vehicles must be in the amount of  
            $10,000.  Before the license is renewed by the DMV, the  
            dealer, other than a dealer who deals exclusively in  
            motorcycles or all terrain vehicles, is required to procure  
            and file a bond in the amount of $50,000.  A remanufacturer  
            bond must also be in the amount of $50,000.  (VC section  
            11710(b).)

          3)Provides that, if any person (1) suffers any loss or damage by  
            reason of any fraud practiced on him by a licensed dealer or  
            one of the dealer's salesmen acting for the dealer, in his  









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            behalf, or within the scope of employment of such salesman and  
            such person has possession of a written instrument furnished  
            by the licensee, containing stipulated provisions and  
            guarantees which the person believes have been violated by the  
            licensee, or (2) suffers any loss or damage by reason of the  
            violation of any of the registration provisions of this code,  
            or (3) is not paid for a vehicle sold to and purchased by a  
            licensee, than any such person has a right of action against  
            such dealer, his salesman, and the surety upon the dealer's  
            bond, in an amount not to exceed the value of the vehicle  
            purchased from or sold to the dealer.  (VC section 11711.)

          4)Provides that claims, against the surety upon a dealer's bond,  
            of a financing agency that has loaned money to a licensee are  
            allowed only to the extent that the claims of any other person  
            or entity with respect to the bond have been satisfied first.   
            Such claims are entitled to preference over the claims of the  
            financing agency.  However, as to any conditional sales  
            contract, as defined, acquired by way of purchase or pledge, a  
            financing agency is entitled to protection under the bond with  
            the same preference as other persons if the financing agency  
            has been defrauded by a licensee.  (VC section 11722.)

          5)Provides pursuant to the Consumer Legal Remedies Act, the  
            CLRA, that 24 specified unfair methods of competition and  
            unfair or deceptive acts or practices undertaken by a person  
            in a transaction intended to result or that results in the  
            sale or lease of goods or services to a consumer are unlawful.  
             (Civil Code (CC) section 1770.)
          
           COMMENTS  :  According to the author, this bill is intended to  
          require dealers to pay-off car liens before trading or selling  
          the vehicles so consumers are not stuck with two car payments.   
          As proposed to be amended, the bill would require a dealer to  
          payoff a lien before it sells or trades the vehicle, and do so  
          within 21 days.  In addition, the bill increases funding for DMV  
          investigators by a small increase in the dealer license fee.

          The author explains the need for the bill as follows:

               Consumers are losing confidence in the automotive  
               marketplace.  They are unable to tell in advance whether a  
               dealer is solvent or about to close its doors, posing  
               unacceptable risks and causing a ripple effect throughout  
               our economy.  SB 95 is a comprehensive solution that will  









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               require dealers to pay outstanding liens on traded-in  
               vehicles before they trade or sell the vehicle to ensure  
               the consumer is protected. 

               In 2008, 120 new-car dealerships and over 416 used car  
               dealerships went out of business in California.  Industry  
               analysts have predicted that at least 500 new car dealers  
               will close their doors in California this year.  Hundreds  
               more independent dealers will close their doors.  This is  
               eroding consumer confidence, which is vital for restoring  
               auto sales.

               As dealerships close their doors, they are leaving  
               consumers with unpaid liens on vehicles they traded-in, as  
               well as a second loan on the newer vehicle they purchased  
               at the dealership.  Too often the consequence is  
               destruction of consumer credit, repossession of the  
               vehicles, job losses due to the lack of transportation to  
               get to work, and consumers being forced into bankruptcy.  

               The DMV reports that the number of consumer complaints  
               involving a dealer's failure to pay off a trade-in has  
               risen significantly from prior years.  As of the end of  
               February 2009, the DMV states that it is investigating 256  
               active cases where a dealer has failed to pay off a  
               consumer's trade-in and 564 additional consumer complaints  
               that the consumer had not yet received verification that  
               title to a vehicle bought from or sold to a dealer had been  
               transferred.

          The sponsor, Consumers for Auto Reliability and Safety (CARS),  
          writes:
          
               When dealerships go out of business they not only fail to  
               pay off liens, but also fail to honor warranties, service  
               contracts, and other services for which car buyers have  
               paid in advance, costing car buyers millions of dollars and  
               eroding consumer confidence.  While SB 729 last year  
               created a fund to help consumers whose lives are destroyed  
               by these irresponsible car dealers, SB 729 did not address  
               the problem.  Dealers still can sell vehicles without  
               paying off the title.

               In 2008, 120 new-car dealerships and over 416 used car  
               dealerships went out of business in California.  Industry  









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               analysts predict that even more dealerships will go out of  
               business in 2009.  As dealerships close their doors, they  
               are leaving consumers with unpaid liens on vehicles they  
               traded-in, as well as a second loan on the newer vehicle  
               they purchased at the dealership.  Too often the  
               consequence is destruction of consumer credit, repossession  
               of the vehicles, job losses due to the lack of  
               transportation to get to work, and bankruptcy.  

           This Bill Responds To Increased Consumer Complaints.   According  
          to supporters, the DMV reports that the number of consumer  
          complaints involving a dealer's failure to pay off a trade-in  
          has risen significantly from prior years.  As of the end of  
          February 2009, the DMV states that it is investigating 256  
          active cases where a dealer has failed to pay off a consumer's  
          trade-in and 564 additional consumer complaints that the  
          consumer had not yet received verification that title to a  
          vehicle bought from or sold to a dealer had been transferred.  

          CARS describes the problems as follows:  

               The stark reality in California is that many more  
               dealerships are going to go out of business this year and  
               for the foreseeable future.  The challenge we face is to  
               prevent the collateral damage to thousands of consumers  
               that is causing enormous hardship to victims and their  
               families, shrinking the auto market, and eroding consumer  
               confidence at a time when our economic recovery depends in  
               large part upon consumers being willing to buy cars again.

               As reported by the Associated Press, San Francisco  
               Chronicle, KOVR-TV, Los Angeles Times, KCRA-TV, KXTV,  
               KGO-TV, New York Times, and other news organizations, many  
               car buyers are falling victim to auto dealers who engage in  
               illegal activity prior to closing their doors. 

               According to the auto industry trade publication Automotive  
               News, "Peter Welch, president of the California Motor Car  
               Dealers Association... said California lost 116 [new car]  
               dealerships in the first 11 months of 2008...He believes  
               closures will total 150 [new car dealerships] by year end  
               and predicts as many as 500 closings in 2009."

               According to a chart California's Department of Motor  
               Vehicles provided to the news media, more than 416  









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               independent used car dealers also went out of business  
               during the first 11 months of 2008.  Some of the  
               individuals associated with those dealerships then turned  
               around and re-opened under different names, sometimes at  
               the same locations.

               The dilemma that car buyers face: hundreds of dealerships -  
               including large franchised dealerships that have been in  
               business for years - are suddenly closing their doors  
               without any warning, taking hundreds of their customers  
               down with them.  Existing laws make those acts a violation  
               of consumer protection statutes and/or criminal statutes.   
               However, when a dealer is out of business, its victims lack  
               effective recourse.  Criminal sanctions have not proven to  
               be a sufficient deterrent, and generally fail to provide  
               restitution or relief to victims.  Even the most diligent  
               prosecutor cannot obtain restitution from a defunct  
               dealership, where typically many creditors are lined up  
               seeking to recover their losses.

          According to CARS, the existing Consumer Recovery Fund fails to  
          provide adequate relief:

               The Consumer Recovery Fund (CRF) established by SB 729  
               (Padilla) is inadequately funded to handle the amount of  
               losses consumers are suffering, severely limits the types  
               of violations that trigger eligibility for relief, and  
               cannot restore damaged credit, lost jobs, or undo other  
               serious harm resulting from dealer insolvencies. 

               Based on information provided by California District  
               Attorneys Association (CDAA) to the Judiciary Committee in  
               support of SB 729, when dealerships go out of business they  
               sometimes leave many victims holding the bag, resulting in  
               more than $1 million in losses at a single dealership.  

               The Consumer Recovery Fund is capped at $5 million per  
               year, and reportedly has collected only approximately  
               $721,000 to disburse.  Even if it were funded at the  
               maximum level allowed by law, based on prior history, the  
               demise of five large new car dealerships could deplete the  
               entire fund.  Meanwhile, hundreds of new car dealerships  
               are predicted to close this year.  The CRF also allows  
               claims for only a narrow subset of violations, involving  
               only 1) failures to pay off liens, 2) failures to provide  









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               clear title, or 3) pocketing the proceeds from consignment  
               sales. 
           
          CARS concludes, "The bottom line: many millions of California  
          car buyers still remain at risk, including from dealers who fail  
          to pay off liens.  According to a recent Associated Press  
          report, "About a quarter of all car buyers are vulnerable  
          because they still owe money on their trade-in or lease when  
          they buy another vehicle, according to industry tracker  
          Edmunds.com.  It's become more common for a driver to owe money  
          on a trade-in as people stretch their car payments over six or  
          seven years to make them more affordable.  Dealers' failure to  
          provide clear title due to unpaid liens also harms subsequent  
          purchasers, who may make every payment in full and on time, only  
          to have their vehicle repossessed by the former owner's  
          lienholder, leaving them with no transportation, no compensation  
          for their losses, and little recourse.  In some cases, dealers  
          who engage in "car kiting" have caused car buyers to lose their  
          jobs, and/or forced them into bankruptcy.

           Author's Narrowing Amendments.   As outlined above, the author  
          proposes to narrow the bill to remove opposition.  The attached  
          mockup reflects the proposed amendments.

           REGISTERED SUPPORT / OPPOSITION  :

           Support 

           Consumers for Auto Reliability and Safety (sponsor)  
           Alameda County District Attorney's Office
          American Federation of State, County and Municipal Employees
          Congress of California Seniors
          California Immigrant Policy Center
          California Statewide Law Enforcement Association
          California Teamsters Public Affairs Council
          Consumer Federation of California
          Consumers Union
          Consumer Watchdog
          California Public Interest Research Group
          Consumer Attorneys of California
          Los Angeles County District Attorney's Office
           
            Opposition (As Proposed to be Amended)
           
          None on file









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           Analysis Prepared by  :   Kevin G. Baker / JUD. / (916) 319-2334