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California Law Becoming Pandemic for Industry

November 2007, F&I and Showroom - Feature

by Jim Lawrence - Also by this author

There’s a new pandemic threatening U.S. auto dealerships at a frightening pace. Dealer operations nationwide will soon feel the effects of legislation that first incubated in the state of California. The germ started with the final acceptance and enactment of AB 68, better known as the California Car Buyer’s Bill of Rights (CBBOR). Not only has it given used-vehicle consumers new liberties, it is also forcing dealers to take on a new set of costly business practices and consumer protections. What does this mean for you? Well, it means that it’s only a matter of time before your dealership’s used-vehicle sales operation is going to catch this “virus” and be required to implement dramatic changes.

According to a May 16, 2007, report issued by the American Financial Services Association, seven states (Arizona, Massachusetts, Minnesota, Missouri, New Jersey, New York and Oregon) have introduced 15 bills containing provisions similar to those adopted in the California CBBOR. Eleven of those bills address contract cancellation, four of which (MA HB 229, MN HB 1675, MN SB 1333, MO SB 335) apply only to cancellation of contracts on used vehicles. The remaining seven (AZ HB 2652, AZ SB 1472, NY AB 343, NY AB 346, NY SB 5072, OR HB 2983 and OR SB 538) apply to both new and used vehicles.

Fueling the spread of this legislation is the appeal it has with politicians and their constituents. And it is spreading quickly. Several other states are considering similar legislation, including Arkansas, Illinois, Montana, Nevada, Pennsylvania, Rhode Island, Tennessee and Texas.

Unified Effort Required

The initial CBBOR legislative effort, which began about three years ago, included much broader consumer protections (i.e., more frightening and onerous to dealers). However, the effort was quickly shot down in the form of a veto by Governor Arnold Schwarzenegger after the initial legislation was deemed too unfriendly to auto dealerships, a major source of sales tax revenue and state income tax. Legislators were also getting an earful from their biggest donors — again, auto dealerships. Those complaints, however, did little to stop the CBBOR virus from spreading.

The second generation of the CBBOR virus got the California Motor Car Dealers Association (CMCDA) involved. It helped to construct legislation that was more dealer-friendly. The “Governator” ( Governor Schwarzenegger) felt obliged to sign that version of the legislation, eliminating the possibility of the dealer-unfriendly version ending up as a ballot initiative on the near-term horizon.

Even with the comments and direction of the CMCDA, the 48-page legislation was groundbreaking for several reasons. For one, it defined what the term “certified” meant. This element brought vehicle makers — albeit kicking and screaming — and their Certified Pre-Owned/Certified Used Vehicle (CPO/CUV) programs into the fold. What it did was allow the CMCDA to demonstrate the associated liability that dealerships face with every used-vehicle deal.

Another positive was the actions taken ended the OEMs’ arms-length relationships with dealerships. Automakers could no longer say they didn’t know or control what their CPO dealerships did. The reality is that OEMs prescribe what dealers must do to comply with their CPO program requirements and, ultimately, their franchise agreements. From the perspective of hungry lawyers, those with the deepest of automotive pockets just got pushed into the pool.

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