August 30, 2004
Governor Arnold Schwarzenegger
State Capitol
Sacramento, CA 95814
RE: AB 1839 (Montanez), Request for Signature
Dear Governor Schwarzenegger,
Consumers Union writes in support of AB 1839 (Montanez). This legislation increases consumer protections when purchasing used cars and obtaining financing of automobiles through car dealers. The legislation was amended significantly throughout the process to address many of the concerns voiced by car dealers. Most recently, the provision that provided consumers the right to return a used car within 3 days of purchase was amended from the bill. This was a significant concession on the part of the author, Assembly Member Montanez. Yet even absent that provision, the legislation still provides significant consumer protections and we urge you to sign this legislation.
Specifically, AB 1839:
• Defines “certified” vehicles, a term now commonly used in the sale of used vehicles;
• Clearly discloses to consumers information regarding the consumer’s credit score and cost of aftermarket items; and,
• Limits the mark-up that dealers may charge consumers for financing to 2.5% for loans up to 60 months in duration or 2% for loans longer than 60 months in duration.
According to the FTC, a car is second only to a home as the most expensive purchase many consumers ever make. The sale of automobiles was ranked the top consumer complaint category in a November 2003 study by the National Association of Consumer Agency Administrators and Consumer Federation of America. Because of the significance of the purchase, consumers should have very specific protections in the transaction. AB 1839 provides the following consumer protections:
Clearly Defining “Certified”
There is a growing trend in the market in which dealers “certify” used cars. The use of this term implies that there is a standard under which a car is certified. Unfortunately for consumers, this is not always the case. AB 1839 sets specific standards for using the term “certified” including that the car has not sustained any damage that substantially impairs its use and safety, the odometer has not been rolled back, and other specific criteria. In doing so, it provides some assurances to consumers that they are getting what they bargained for.
Increases Consumer Disclosures
AB 1839 increases consumer disclosures in purchase transactions. Specifically, AB 1839 requires dealers to clearly disclose to consumers the following:
Consumer credit scores
This addresses the problem of some consumers being steered to higher cost loans when they actually qualify for less expensive loans. Consumers often do not realize that dealers are not offering them the best rates for which they qualify because the dealer pockets the difference between the assignee rate and the rate offered to the consumer. Because consumers do not know of the compensation, they trust that the 3rd party assignee controls the rate and that the dealer is offering the best rate.
This issue was recently highlighted in a lawsuit settled in February 2004 that involved dealer mark-ups in financing. Reports submitted by the plaintiffs demonstrated that minority borrowers paid more in mark-ups than did comparable white borrowers. Had the consumers’ credit scores been made available, consumers would be more likely to see that their rates were artificially inflated. AB 1839 requires that dealers disclose the consumer’s credit score thereby mitigating this risk.
Explicit description and cost of any aftermarket items
Aftermarket items might include: warranties, alarms, fabric protections and other items that do not come standard with the purchase of an automobile. Clear disclosure of the items and cost will ensure that consumers are only getting the products that they want and that they fully understand their cost. Furthermore, this clarifies that aftermarket items are optional and that the consumer is under no obligation to purchase them. There is no prohibition on the items nor is there any restriction on whether or not dealers may encourage consumers to purchase them. AB 1839 simply provides consumers information regarding these products.
Limits the mark-up that dealers may charge consumers for financing to 2.5% for loans up to 60 months in duration or 2% for loans longer than 60 months in duration.
As described above, the current market conditions provide significant potential for abuse when dealers sell loans to creditors. The fee charged by dealers for this service often varies from one consumer to the next and are sometimes very excessive. AB 1839 addresses this issue by limiting the size of the dealer mark-up.
AB 1839 is very important consumer protection measure. Because it provides consumers greater information and rights, it corrects a failure in the marketplace. AB 1839 protects consumers in one of their largest financial dealings and holds dealers accountable without adversely impacting dealers who are not engaged in abusive behavior. We urge you to sign it.
Sincerely,
Shelley Curran
Policy Analyst
Cc:Assembly Member Cindy Montanez
Mr. Richard Costigan, Legislative Secretary