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California Dealers Face New Consumer Protection Bill

February 12, 2009

A California lawmaker is looking to boost the bond amount dealers there have to pay to operate in response to the rash of dealership closures that have left consumers on the hook for unpaid trade-ins.

The bill, SB 95, was introduced on Jan. 27 by Sen. Ellen Corbett (D-San Leandro). If passed, the bill would not only increase the bond amount dealers have to pay, but would also require dealers to pay off liens on used vehicles before reselling them.

“Too many times, consumers are left holding the bag when car dealers go out of business, or simply do not live up to their end of a contract,” Corbett said. “This bill will create policies and remedies for customers who until now have had little or no recourse.”

As of December, the California Department of Motor Vehicles had 319 open investigations on dealers for failing to pay off liens or register a vehicle, up from 200 cases reported during the same period last year. The agency also recorded 1,655 similar complaints against dealers from July to September, which was double what was recorded during the same period in 2007.

Corbett’s bill would raise the dealer bond from $50,000 to $250,000 for franchised new-vehicle dealers. Independents dealers would see their bond amount increase to $100,000. The cost does not include what a dealer would pay in premiums.

Opponents said the bill would lead to more dealer failures in a state that lost 480 licensed dealers last year, and pointed to the fact that dealers need to have liquid assets of 10 times or more than the bond they’d have to post. This, detractors said, will be impossible for dealers in the current economic environment.

Regulators in California and other states, including Florida, Iowa and Washington, are seeing a surge in consumer complaints against closing dealers not paying off remaining loan balances on trade-ins. They warn the problem is sure to grow this year because of the deepening recession. Few states have programs that require dealers to post substantial insurance bonds. However, consumers in states with no such program have little recourse but to sue the dealer and hope to get a portion of the assets if the dealer files for bankruptcy protection.

The bill, which was sent to the Senate Judiciary Committee on Feb. 5, would require a majority vote for its passage. Here is a breakdown of what SB 95 will do:

• Allows car buyers to access the assets of the dealership principals, if a dealership knowingly entered into contracts that would not be honored due to pending insolvency.

• Requires dealers to pay off liens either prior to transferring vehicles or before the next payment is due, whichever comes first.

• Increases the dealer bond from $50,000 to $250,000 for franchised new-car dealers and $100,000 for independent car dealers. (Hawaii requires dealer bonds of up to $500,000.)

• Expands violations that trigger access to the bond, for car buyers who are victimized by violations of contract law, tort law, or other statutory provisions and clarifies that car buyers can recover reasonable attorneys fees.

• Eliminates the New Motor Vehicle Board’s redundant program to mediate disputes between car buyers and licensees, a task more appropriate for the Department of Consumer Affairs.

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