Used car sales bill on governor's desk

By: EDMOND JACOBY - Staff Writer | Sunday, September 12, 2004 9:24 PM PDT ∞

A little noticed piece of legislation that backers say will protect consumers from unscrupulous car dealers is sitting on Gov. Arnold Schwarzenegger's desk, waiting for him to decide whether to sign it into law or veto it.

The legislation's opponents, including the California Chamber of Commerce, have denounced it as a so-called job killer, charging that even if it offers needed consumer protections it should be vetoed because it is bad for consumers. Among its detractors is Escondido's Republican Assemblyman, Mark Wyland, who voted to kill the measure in the Assembly on Aug. 27.

Assembly Bill 1389 would make two major changes in the way used cars are sold in California: it would limit a dealer's ability to add on interest to financing he arranges on behalf of a buyer, and it would prohibit the use of the term "certified" when describing a used car offered for sale unless certain steps are taken by the dealer.

Defining 'certified'

"The certified label adds absolutely nothing to the value of a used car," said Janelle Beland, a legislative assistant to the legislation's sponsor, Cindy Montanez, D-Mission Hills.

"'Certified' means nothing as the law is now, but this legislation sets minimum criteria that must be met to apply the word 'certified,' including that the odometer not be rolled back, that the car not be a manufacturer's repurchase or a salvaged car, that it not be a rebuilt wreck or a lemon law buyback," she said. A manufacturer's repurchase is a car that is bought back from a consumer to resolve a dispute.

According to Beland, more than a million used cars were sold as "certified used cars" in 2002, a quantity that more than doubled from 1997. Some of those cars carried price premiums as great as $3,000 because of the label, she said, even though it says nothing about the car to which it is attached.

But some dealers insist that they already comply with much higher standards for "certified" used cars than the law would impose.

A test case

"It's my understanding that Toyota pioneered "certified" in 1995, and they chose Toyota of Escondido to test it," said Michael Boone, used car sales manager at the Toyota dealership at Highway 78 and Broadway in Escondido.

"Used cars outsell new ones by three to one, and Toyota wanted to gain market share," he said, adding that the word has very specific meaning for Toyota.

"You can get specifics about what a Toyota certified used car is right off the Internet, and when Toyota certifies one of its used cars it means that it's in like-new condition and it carries a factory 6-year, 100,000-mile warranty," he said.

The legislation would require dealers who sell used cars as "certified" to have a technician inspect the car and to give a detailed report to the buyer of what the technician's inspection found, a step already taken by Toyota and Honda certification programs.

Just a start

At Hoehn Honda Used Cars on Paseo del Norte in Carlsbad, sales manager Thomas Sowles said that a rigorous inspection is just the beginning for Honda certified used cars.

"Every Honda made in 1999 or later with less than 80,000 miles is eligible ---- if it passes the inspection," he said.

According to Sowles, the inspection even includes verification that body-panel vehicle identification numbers match, indicating that they have not been replaced as part of a collision repair. The cars also must have all service records, be up to date on required service items, and have the proper tire size and type as specified by Honda.

"But if it's certified by American Honda," Sowles said, "it has a manufacturer's warranty and qualifies for manufacturer's financing," he said.

Chamber warnings

Financing provisions of the legislation that limit add-on interest alarm the California Chamber, which says they will drive up the price of used cars.

The legislation "puts limits and restrictions on the ability of car dealers to offer the most competitive prices to consumers," said Sara Lee, spokeswoman for the chamber.

In particular, it does that by "limiting the finance options they're able to offer," something she said would force dealers to raise prices.

"We wrote a letter to the governor opposing this legislation," said Ted Owen, president and chief executive of the Carlsbad Chamber of Commerce.

"The reason we labeled it a 'job killer' is because it will breed lawsuits," he said.

"Most of us buy and sell cars back and forth between ourselves, and the bill doesn't recognize those sales, it applies only to dealers," he said.

No real help

"The real reason we oppose most legislation like this is that it's frivolous; if dealers had no standards or rules they had to obey, then this might be warranted, but they do, and this is just another layer of regulation that increases the cost of doing business," Owen said.

His position was echoed by Wyland, who said his opposition to the bill was based on a belief that it would do little for consumers but would foster litigation.

But he said he felt frustrated because he favors consumer protections and some of the features of the legislation deserved a closer look.

"By no means is business always right, and if the governor feels that in its present form the legislation is right, well, good," Wyland said. "If not, maybe (Assemblywoman) Cindy (Montanez) will reintroduce it and we can have another look at it."

How things work

According to industry observers and some of the dealers interviewed for this story, current financing practice by used car dealers ranges from lending their own money to buyers to offering a customer's credit application to one or more private lenders.

When a lender approves the loan, the dealer writes a contract requiring higher interest on the borrowed money than the lender approved. In the trade it's called extra participation points. The dealer then assigns the loan to the private lender and pockets the difference in the interest amount, making it part of his profit on the sale.

Extra participation points are perfectly legal, but a survey conducted in May by San Diego- and Washington, D.C.-based Decision Research found that more than half of all California consumers questioned did not realize that dealers inflate loan rates to plump up profits. Many, in fact, said they thought the practice was illegal, the survey found.

There is a limit

The legislation does not prohibit the practice, but sets limits on how much dealers can add to loan interest costs at 2.5 percent for loans up to 60 months, and 2 percent for loans longer than 60 months.

"And therein lies the problem," said Bill Kornik, general manager of Bob Baker Volkswagen on Paseo del Norte in Carlsbad.

"California is a spot delivery state, and there is no cooling off period. We're required to disclose that in writing on every contract," he said.

"Well, when the buyer takes delivery and drives away, the dealer is the holder of the paper, he's the lender," Kornik said.

"The changes in the financing disclosure laws will mean there will be no spot deliveries," he said, because before the dealer can comply with the law he would have to reassign the loan, a separate process that could take several days.

A question of margin

Most banks already set limits on the markup a dealer can add to their loans, usually around 3 percent, the dealers told the North County Times.

"Obviously, it's a margin that employers need in California in order to stay open," said Lee of the chamber. "If part of their profitability is taken away, they're probably going to have to raise prices," she said.

Yet Raul Flores, administrator of Best Offer Auto on South Coast Highway in Oceanside, which has no manufacturer affiliation, said he thinks the law may be a good idea and that it may provide useful consumer protections.

"It really doesn't affect us," he said, pointing out that instead of declaring that it sells certified used cars, his company offers a $50 allowance against the purchase price for customers who want to take a car from the lot to an independent mechanic for a pre-purchase inspection.

No hints yet

Schwarzenegger has not indicated whether he would sign the bill, one of 800 pieces of last-minute legislation dumped on his desk by the legislature. He has until the end of September to do one or the other, sign or veto.

The Decision Research survey found that voter support for the legislation was about 80 percent, even after hearing arguments both for and against it, the company reported.

Contact staff writer Edmond Jacoby at (760) 739-6675 or ejacoby@nctimes.com.

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