The Car Buyer's Bill of Rights, recently approved by the Governor, will impose new restrictions on the marketing and sales practices of California car dealers. With an effective date of July 1, 2006, dealers have almost a year to prepare for compliance.

Assembly Bill 68 is the product of a compromise between consumer advocates and car dealers. The Legislature approved a stronger version of the law in 2004, but opposition from the dealers led to the Governor's veto. Proponents renewed their efforts in the Legislature and also began the process of qualifying the measure as a ballot initiative. The bargain reached will mean one fewer proposition for the voters to consider in November.

Much of the skirmishing over the legislation centered on whether and on what terms used car dealers should be obligated to rescind deals on used cars. Existing law contains no cooling off period although some dealers voluntarily give customers several days to return cars for a refund or exchange.

The Car Buyer's Bill of Rights compels dealers to offer a contract cancellation option on all used vehicles priced at $40,000 or less, excluding motorcycles and recreation vehicles.   

At a minimum, the option allows the customer to return the car for any reason within two days of taking delivery, provided that he or she has driven fewer than 250 miles. The car must be returned in an undamaged condition, except for any defect or mechanical problem that became evident after delivery.

The law sets maximum charges for the cancellation option and its exercise that increase with the price of the car. For example, if a car costs between $10,000 and $30,000, the dealer may charge up to $250 for the option. On a car in this price range, a dealer who charges $250 for the option may collect an additional $250 as a restocking fee if the customer unwinds the deal. Alternatively, a dealer who charges nothing for the option may pocket a restocking fee of up to $500.

After deducting the fees authorized by the statute, the dealer must refund the full purchase price to the customer within two days of the return of the car. Any trade-in promptly must be returned to the customer unless it has been sold, in which case the dealer must pay the customer for the car.

While dealers must inform all customers of contract cancellation option, it is unclear how actively they will promote it. Customers may wonder if a car is a sound purchase when salespersons are encouraging them to pay more for the right to back of the transaction.

Another key portion of the Car Buyer's Bill of Rights defines when used cars can be advertised as “certified” or with a like term. The Vehicle Code already places a myriad of restrictions on advertising by dealers, but until now has not set any standard with respect to the “certified” designation. This has led to divergent approaches in the marketplace.

The new statute sets a baseline. The “certified” designation cannot be used when the odometer reading is inaccurate, the car was reacquired by its manufacturer or a dealer pursuant to federal or state warranty laws, the title has been inscribed with a negative notation such as “Lemon Law Buyback” or “salvage,” the car has sustained damage that substantially impairs use or safety, the car has sustained frame damage, the dealer has not provided the buyer with a completed inspection report that indicates all of the components inspected, the dealer disclaims any warranty of merchantability, or the dealer sells the car “AS IS.”

The balance of the Car Buyer's Bill of Rights relates mainly to dealer-arranged financing. A principal innovation is a new ceiling on the markup, often known as “dealer reserve,” that dealers can apply to the wholesale interest rates they obtain from finance companies.

Under existing law, dealers may increase wholesale rates by several percentage points and finance companies then pay the dealers for some or all of the projected revenue stream associated with the markup. The practice is allowed under California's finance and consumer protection laws, assuming that costumers are adequately informed of the retail rate they will be charged. Kunert v. Mission Financial Services Corp., 110 Cal.App.4th 242 (2003).

The new statute (motorcycles and off-road vehicles excluded) caps interest markups at 2.5 percentage points on contracts having an original scheduled term of 60 or fewer months and at 2.0 percent on longer term contracts. The amount of the markup need not be disclosed to customers. Thus, dealers may continue to generate revenue through bumping up rates, but only within the prescribed limits.

Currently, dealers are not required to tell prospective customers about their credit scores. This too will change under the Car Buyer's Bill of Rights. Dealers who obtain scores from credit reporting agencies must provide, prior to sale, a separate written notice that reveals the credit score obtained and used by the dealer, the name of the credit reporting agency that provided the score, and the range of possible credit scores. The notice must contain specified language that describes the significance of credit scores.

The statute expands the categories of optional items, listed in Civil Code Section 2982, whose costs must be separately itemized in conditional sale contracts. Dealers must disclose the charges for theft deterrent devices and surface protection products, as well as any charge for a contract cancellation option agreement. Line items for these charges will be added to the standard (and already very lengthy) preprinted conditional sale contracts that dealers typically purchase from vendors.

To assist customers in understanding the costs associated with optional items, dealers must supply a new and separate written disclosure prior to the execution of a conditional sale contract. This disclosure must state the price of service contracts, insurance products, debt cancellation agreements, theft deterrent devices, surface protection products and contract cancellation option agreements. It must specify the amount of the regular installment payment with and without the enumerated options.

In addition, the Car Buyer's Bill of Rights prohibits dealers, whether or not they arrange financing, from negotiating deal terms and then adding charges for goods or services without obtaining the customer's informed consent. It also precludes dealers from inflating downpayments, or otherwise adjusting credit terms, for the purpose of disguising the actual charges for goods or services to be added to the contract.

The Car Buyer's Bill of Rights, in sum, adds to an already complex regulatory environment for California car dealers, but will not profoundly change the relationship between seller and buyer.

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Jeffrey S. Galvin practices advertising and marketing law at Downey Brand LLP in Sacramento and previously worked at the Federal Trade Commission.