Bittersweet Deal

California’s Car Buyers Bill of Rights

 

Consumers for Auto Reliability and Safety

Sacramento, California

November 28, 2007

 

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Index 

Acknowledgements

Car Buyers Bill of Rights Milestones

Key Provisions of the CBBR

Basis for Report

Findings

Two-day return option is a lemon

Two-day return option caps

Standardized dealer form defeats purpose of the law

DMV and DCA Misled Consumers

“Loan packing” continues to occur

Caps on dealer kickbacks for raising interest rates

“Certified” used cars

Disclosures in languages other than English

Recommendations

Downturn in Automotive Market Poses New Risks to Consumers

Chart of dealerships under investigation or prosecution

Tips for Consumers

 

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Many thanks to all who gave generously of their time, talent,
and expertise to contribute to this report, including:

 

Ken McEldowney, Joe Ridout, Linda Sherry, Cher McIntyre, and Staff at Consumer Action

Pastor Herrera, Rigoberto Reyes and Colleagues at Los Angeles County Office of Consumer Affairs

Henry Martin, Watsonville Law Center

Ofra Pleban, Legal Services Corporation

Zach Vander Meeden, Better Business Bureau of San Jose

California Members of the National Association of Consumer Advocates

And to all the many individual consumers who have contacted CARS and spoken up to help others, especially Sheila Dharod, Oscar Fuentes, Andy Saens, and Lisa Emory.

This report was made possible by a grant from the
California Consumer Protection Foundation.

The Foundation’s support for pro-consumer education and advocacy
 is gratefully acknowledged.

 

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California’s Car Buyers Bill of Rights:

A Bittersweet Deal for Consumers

 

Car Buyers Bill of Rights milestones

Amid a flurry of media coverage, Governor Schwarzenegger signed California’s Car Buyers Bill of Rights on July 26, 2005, at a Capitol ceremony attended by the author, Assemblymember Cindy Montañez, auto dealers and their lobbyists. No consumer advocates were included in the festivities. The Governor proclaimed then that

“This is a big victory for the people of California…The Car Buyers Bill of Rights is going to keep one of California’s leading retail industries booming and strengthen the consumer faith and trust that is so essential to our vibrant economy.” 1

With his signature, Schwarzenegger reversed his earlier veto of a similar bill. He also pleased auto dealers—among his most generous campaign contributors—by staving off a stronger, more consumer-friendly Car Buyers Bill of Rights initiative that closely resembled an earlier initiative Consumers for Auto Reliability and Safety (CARS) had filed in 2004. Polling showed that the initiative was popular with all segments of the California public, enjoying 83% support among likely voters. 

In 2005, the Car Buyers Bill of Rights became embroiled in the battle between the Governor and lawmakers/labor unions over the Special Election.  Labor unions gathered enough signed petitions to place a Car Buyers Bill of Rights initiative on the ballot in the Special Election. But instead of submitting the petitions to the Secretary of State, they turned them over to the auto dealers, who said they intended to burn them.

CARS and other consumer groups warned that the watered-down legislative compromise had serious flaws. Auto dealers actively supported the final version, but CARS withheld support and did not urge the Governor to sign the bill. CARS cautioned other states against adopting similar measures and made it clear California’s law should not be regarded as a model.

On July 1, 2006, California’s Car Buyers Bill of Rights 2 took effect. CARS publicized the new law, generating front page news statewide and making headlines across the nation.  CARS again cautioned the media and the public about potential pitfalls and promised to monitor dealers’ compliance. CARS also joined with Consumer Action to provide education and outreach in English, Spanish, Korean, Tagalog, Vietnamese, and Chinese. Consumer Action has distributed more than 50,000 copies of brochures about the law to hundreds of community-based organizations statewide.

On March 7, 2007, CARS and Consumer Action issued a Preliminary Report, California’s Car Buyers Bill of Rights, Looking Under the Hood, assessing compliance with the law after it had been in effect for 8 months. That report is posted on CARS’ website, at: http://www.carconsumers.com/press_release_3.7.07.html

 

Key provisions of the Car Buyers Bill of Rights

• Dealers must offer at least a two-day return option for purchasers of used vehicles priced below $40,000 (with some exceptions), including vehicles sold “as-is.” However, dealers are permitted to charge consumers a non-refundable fee in advance for the option, plus a restocking fee if they choose to return the vehicle.

• Dealers are prohibited from engaging in “loan packing” of add-ons commonly stashed in the monthly payments, while deceiving customers about the true cost. 3

• Dealers must provide detailed disclosures about the price to purchase items commonly deceptively “packed” into auto loans, including anti-theft devices, GAP insurance, paint sealant, and extended service contracts

• Dealers must disclose to consumers their credit scores, in writing

• The amount dealers may be compensated in return for raising the interest rate on auto loans is capped at 2.5% for loans up to 60 months, and 2% for longer loans

• Dealers are prohibited from selling lemon law buybacks, vehicles with frame damage, or other problem vehicles as “certified” used cars

 

Basis for Report

This report is based on extensive statewide research, including:

A survey of auto fraud experts throughout the state with decades of expertise in representing victims of auto dealer practices, including legal experts with the following non-profit organizations that provide assistance to the public:

• Legal Services Corporation
• Public Counsel
• Public Law Center
• Watsonville Law Center
• Consumer Action
• National Association of Consumer Advocates

(Note: A total of 26 experts responded. They all completed the survey. The survey results are included below, in text boxes, by each category.)

Responses to Public Records Act Requests filed with the following government agencies and officials:

• California Department of Motor Vehicles, which licenses auto dealers and has enforcement authority to crack down on violations of the Car Buyers Bill of Rights

• California Attorney General Jerry Brown

• District Attorneys in all 58 California Counties

Examination of consumer complaints in English and Spanish filed with the Los Angeles Department of Consumer Affairs, the largest county consumer affairs office in the state, and the one that serves the largest auto market

An informal survey conducted by the Better Business Bureau in San Jose, based on consumer complaints filed with the BBB. 4

An examination of standardized forms used by auto dealers statewide

Interviews with individual consumers who contacted CARS, Consumer Action, other consumer groups and non-profits, and/or hotline call centers to complain about their experiences under the law

 

Findings

The Car Buyers Bill of Rights is a bittersweet deal for California consumers.

• Consumers rarely, if ever, benefit from the two-day return option. Dealers discourage consumers from obtaining the return option, sometimes by misrepresenting how much they can charge for the option and the restocking fee

• While some provisions have helped curb some of the worst abuses, some forms of fraud continue to occur.

• Many dealers are not complying with laws that require them to make disclosures in languages other than English, when the deal is negotiated in another language

• The DMV has failed to issue regulations that the DMV itself indicated are needed to make the law workable. Among them—a regulation to require dealers to give consumers a receipt when they return a car under the return option, so they will have written proof they returned it and are no longer obligated to make loan payments.

• Public enforcement is lax or nonexistent, with relatively rare exceptions. The Attorney General has not brought any cases to enforce the Car Buyers Bill of Rights. The District Attorney in San Diego has been more active in pursuing cases against auto dealers than District Attorneys in other counties. (Note: some rural counties do not have any dealerships located in their jurisdiction.)

• The DMV and Department of Consumer Affairs have not done enough to reach out and educate the public about the new law. Information posted on the DMV and DCA websites about the two-day return option is misleading and incomplete.

 

• Consumers in each part of the state who purchased vehicles priced below $30,000 reported that dealers claimed it would cost $400 to $600 for the return option, even when the law caps the maximum charges at $75 to $250.

• The law is needlessly complicated and confusing. Even experts at the DMV had difficulty sorting out what consumers would have to pay if they use the return option.

• Dealers are required to post large signs in sales rooms about the lack of a “cooling off period,” but those signs do not disclose the price caps for the return option.

• The legally required signs posted at dealerships also fail to inform consumers that they can negotiate for better terms--for example, no charge for the return option, seven days instead of two, and a lower restocking fee based on actual miles driven.

• Some dealers trick non-English speaking car buyers into signing a form in English giving up the return option, even when the deal was negotiated in a different language.  California law requires disclosures to be made in five major languages, if the deal was negotiated in that language.

Even if consumers get the option, standardized dealer form defeats purpose of the law

• California auto dealers have gone beyond the law and created a “Catch-22” scenario. To get the return option, dealers demand that car buyers sign a new, standardized form. The trick is that the form gives car dealers “sole discretion” to decide whether a vehicle is eligible for a refund, or not. This puts the buyer at the dealer’s mercy and defeats the purpose of the new law.  

• Some experts have expressed the opinion that the form itself may be illegal. However, to date, no agency has prohibited dealers from using it.
  
  A copy of the dealer’s standardized form is posted on CARS’ website, at:
  
  http://www.carconsumers.com/Vehicle_Delivery_Condition1.pdf

 

DMV and Department of Consumer Affairs Misled Consumers

• Summaries of the CBBR posted on the Web by the DMV and Department of Consumer Affairs (DCA) fail to inform consumers that there is a cap on what dealers are permitted to charge. Instead, they state that the maximum charge is “what you can expect to pay.” That is misleading because it implies that the amount could lawfully be higher.

• The DMV and DCA Websites also fail to inform consumers that they can negotiate for better terms. For example, a consumer could bargain for no added charge for the return option, seven days instead of two, 500 miles instead of 250, and a lower restocking fee.

Survey results:  Only 16.7% of experts surveyed
said that the return option is working for some consumers.
Many more said it was not working for ANY consumers (41.7%)
or making things worse for consumers (20.8%). Another 37.5% said
there were many problems with the return option and provided details.
(Note: some answered that the return option is not working and
also added detailed comments, so total responses exceeded 100%.)

 

“Loan packing” continues to occur

Dealers continue to deceive buyers into believing they are getting add-ons at low cost, or free, when they are actually being charged high markups for products of little or no value. This highly sophisticated, high-tech crime can add thousands onto the price of a new or used vehicle, without buyers even being aware they have been cheated.

 

Survey results: 40% of experts surveyed said that loan packing

has not been reduced under the Car Buyers Bill of Rights.
28% said loan packing has been reduced, but only “sometimes.”
Another 32% commented further. Those experts said they were unsure
or had found that dealers now use the signed documents as a defense, even
when consumers are misled into signing them on false pretenses.

 

 

Most auto lenders pay dealers a hidden fee to get car buyers to borrow money at a higher interest rate than they deserve, based on their credit histories. This extra interest is called a dealer “markup.” It is a form of kickback-- extra profit that is split between the dealer and the lender.

The CBBR caps the “markup” amount dalers are allowed to receive.  They may not receive more than 2.5% from lenders for loans up to 60 months, and 2% for longer loans. It is too soon to know whether dealers and lenders are complying with the caps in the law.

Survey results:  None of the experts surveyed said that markups
are higher under the new law. 15.4% said the law has not made a difference.
The largest percentage, 76.9%, said that it is not possible to tell, absent an investigation.
Without internal documents that are difficult to obtain from dealers and lenders,
it is not possible to know how high the dealer markups are.

 

“Certified” used cars

Consumer complaints and reports to CARS about vehicles with frame damage that are being advertised and sold as “certified” used cars have dropped. This provision appears to have curbed some of the worst abuses, but without statewide systematic monitoring of “certified” used car sales, it is not possible to know with any certainty if dealers are fully complying with this provision of the law.

 

Survey results: This question drew the most positive responses
among experts. 36.4 said that the “certified” provision in the new law
has improved protection for consumers who buy “certified” vehicles.
31.8% said it hadn’t made any difference. Another 27.3% said the law
had mixed results. (Note: a few experts gave more than 1 response,
making the total slightly more than 100%.)

 

Disclosures in languages other than English

According to legislative findings, more than 12 million Californians speak languages other than English in their homes. 5

In a classic bait-and-switch routine, auto dealers advertise and negotiate sales in languages other than English, then fail to provide the legally required disclosures in those languages. This clearly violates Civil Code Section 1632, which was expanded in 2003 to include four languages in addition to Spanish. 6  

In some cases, defense attorneys for auto dealers admit the forms were not provided in languages other than English, but claim that they did not have to comply with the law, and are under no obligation to provide written disclosures in the five languages specified in Civil Code Section 1632. 

(Note: AB 309 (Chu), was enacted partly due to alleged abuses by a dealership in the Assemblymember’s district, which led to a settlement negotiated with the Asian Pacific American Legal Center after APALC received numerous complaints from Chinese-speaking consumers.

 

Recommendations

Give the Law a Tune-Up

Legislators and the Governor should either fix the two-day return option or repeal it.  Recommended fixes:

Eliminate the extra fee for the return option. For years, many dealers have offered a return option at no extra charge, and according to the auto dealers themselves less than 1% of car buyers chose to return vehicles for a refund. 7 Instead of engaging in “gotcha” tactics, dealers and buyers had a meeting of the minds and the consumers were satisfied with their purchases. This is an industry best practice that should be adopted industry-wide.

The restocking fees are more than it would cost to rent a comparable vehicle. Charging a reasonable restocking fee is enough to discourage “joy riding” and fairly compensate dealers when consumers drive vehicles less than 250 miles, particularly since the vehicles are already used.

Allow consumers to have the restocking fee deducted from their refund, instead of requiring them to pay the dealer an additional amount up front before they can return the car, and before they get a refund.

Require written disclosures of the maximum restocking fees, on the signs posted in dealer’s offices.

Prohibit dealers from evading the law by tricking consumers into signing forms that give the dealer “sole discretion” to decide if a vehicle can be returned, or not.

Increase the two-day minimum to three days. Cooling-off periods for homes, door-to-door sales, and other high-pressure, high stakes sales are for three days. The two day period causes confusion and makes it harder for consumers who have to leave work to return a bad car.

The DMV should issue its long-overdue draft regulations to make the law workable, such as requiring dealers to provide car buyers a receipt when a vehicle is returned. Otherwise, consumers who take out a loan may lack proof they no longer own the vehicle and are no longer obligated to make payments.

 

The DMV, district attorneys, and California’s Attorney General should enforce existing laws more strenuously

 

For most Californians, buying a car is the second-largest purchase they make, second only to purchasing a home. The average price for a new vehicle is over $22,000. Most car buyers incur substantial debt to purchase a vehicle, with the average loan for a new vehicle about $26,000 and used car loans averaging close to $17,000. 8

Auto sales complaints typically rank among the top consumer complaints nationwide. 9 Now car buyers also face increased risks due to the downturn in the automotive market.  Car sales in California are down over 7% compared with last year’s figures.

Across the nation, softening auto sales are leading manufacturers to weed out lower-volume dealerships. Throughout California, both large franchised auto dealerships and small corner car lots are going out of business, leaving their customers in the lurch and costing them millions of dollars.

Some dealers promise to pay off the liens on vehicles that are traded in, but fail to abide by their promises, sticking unsuspecting customers with two car payments and only one car. Some dealers take cars from consumers on consignment, sell them, and pocket all the money without paying the consumer for their car.

On October 10, Governor Schwarzenegger signed SB 729 (Padilla), a new law to to compensate victims of insolvent dealerships. However, the law has a delayed effective date and the DMV will not begin to collect funds for the Recovery Fund until July 1, 2008.

The legislative analysis of SB 729 provides examples of dealerships under investigation or prosecution for failure to pay license or registration fees, failure to pay off loans on trade-in vehicles, or failure to pay off a consigned vehicle: 10 The chart below quotes from the analysis. Note: this is not the total list of dealerships under investigation, but only a sample.

SB 729 (Padilla) Consumer Motor Vehicle Recovery Fund

 

In some cases, victims of dealerships that closed have been forced to file bankruptcy when they could not make the extra, unanticipated car payment and their vehicles were repossessed. Some have lost their jobs when they lost their only means of transportation to get to work.

 

Tips for Consumers

Brochures in English and Spanish about California’s Car Buyers Bill of Rights, with tips for consumers, are posted on the Consumers for Auto Reliability and Safety Website, at: http://www.carconsumers.com/CBBR_summary.html

FAQs are posted at:
http://www.carconsumers.com/CBBR_summaryFAQ.html

Brochures in English, Spanish, Chinese, and Vietnamese are posted on the Consumer Action website, at:
http://www.consumer-action.org/english/articles/california_car_buyers_bill_of_rights/

 

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1   Governor Schwarzenegger signs Car Buyers Bill of Rights, July 26, 2005. Governor’s Press release, at:
http://gov.ca.gov/index.php?/press-release/1682/

2   AB 68 (Montañez),  enacted in 2005. A summary of the Car Buyers Bill of Rights and brochures in English and Spanish with tips for consumers and FAQs are posted on Consumers for Auto Reliability and Safety’s website, at: http://www.carconsumers.com. Brochures in English, Spanish, Chinese, Korean, and Vietnamese are also posted at Consumer Action’s website, at: http://www.consumeraction.org.

3   For an interesting explanation about loan packing practices and prosecutions in CA, see: F&I Newsletter, Feb. 7, 2007, at:
http://www.fi-magazine.com/t_inside.cfm?action=article_pick&storyID=1100

4   Results of review of complaints filed with BBB in San Jose: “We had 21 of 290 complaints since July 1, 2006 where consumers wanted to return a used automobile shortly after purchasing it because of a problem with the auto. In only 2 of the 21 cases did the consumer mention knowing about the return option.” Zach Vander Meeden, Public Relations Director, BBB of San Jose.

5   See AB 309, Chu, 2003.

6   Pursuant to AB 309, authored by former Assemblymemer Judy Chu, posted at:
http://info.sen.ca.gov/pub/03-04/bill/asm/ab_0301-0350/ab_309_bill_20030908_chaptered.html

7   “Used car measure mired in disputes. “ “Fewer than 1% of car buyers at such dealerships seek to [cancel the deals].”  Sacramento Bee, August 16, 2004.

8   Automotive News, 2007 Market Data, May 14, 2007.

9   Annual National Association of Consumer Agency Administrators (NACAA) and Consumer Federation of America (CFA) Consumer Complaint Survey Report, February 10, 2005. “Automobile sales have been consistently listed by consumer agencies among the top five complaint categories for the past five years.” Note: agencies contributing data to the survey include numerous California agencies.

10   Analysis of SB 729, CA Senate Judiciary Committee, posted at:
http://info.sen.ca.gov/pub/07-08/bill/sen/sb_0701-0750/sb_729_cfa_20070425_141418_sen_comm.html