Buy Here, Pay Here: a business model for used-car dealerships in which the company serves as both the seller and the loan holder. They operate largely under the radar, typically serving customers unable to acquire credit at more traditional car dealerships. Their business practices are characterized by inflated interest rates and frequent repossessions from their cash-strapped customers. And they have almost entirely escaped scrutiny from policymakers.

This fall, the Los Angeles Times ran a three-part series on Buy Here, Pay Here dealerships. The report, which drew on original documents from dozens of businesses and government entities as well as accounts of consumers who have interacted with such dealerships, included a number of intriguing factoids:

  • Buy Here, Pay Here dealerships sold 2.4 million automobiles in 2010, up from 1.3 million in 2000.
  • Market research estimates there are up to 33,000 such lots nationwide, compared to 22,000 new car dealerships.
  • Buy Here, Pay Here dealerships make about $80 billion in loans annually, according to the Federal Insurance Deposit Corp.
  • Profit margins average about 40 percent, which doubles what new car dealerships typically earn.
  • Interest rates for loans from the dealerships can top 30 percent. Average rates at other used-car dealers for customers with good credit range from 5 to 8 percent, according to HSH Associates.
  • About one in four buyers at Buy Here, Pay Here dealerships default.

The Times series brought attention to an issue that hasn't been a primary concern for policymakers. When asked by Governing to comment for this story, the National Conference of State Legislatures, the Council of State Governments and the National League of Cities said regulation for used-car dealerships is not an issue that those organizations track. Jack Tracey, executive director for the Community Auto Finance Association, a lobbying group for Buy Here, Pay Here companies, did not return multiple calls and emails for comment.

John Van Alst, an attorney who has focused on automobile fraud at the National Consumer Law Center (NCLC), told Governing he isn't surprised that used-car dealerships aren't a priority for state and local policymakers. It's reflected in their regulations -- or lack thereof.

"The business model does lend itself to predatory lending practices," he said, although he pointed out that non-profit charities are able to operate on a Buy Here, Pay model without taking advantage of consumers. "It needs a lot of oversight, and the current for-profit model raises a lot of concerns."

Buy Here, Pay Here dealerships differ from more traditional car sellers because after making a loan, they continue to hold it, instead of selling it to third-party lenders as most other dealers do, Van Alst explained. Because they control the entirety of the loan process, they have few limits for whom they are willing to give loans to, even those who are clearly in no position to take on the financial responsibility, he said. They can set prices higher than the suggested Kelly Blue Book value, charge exorbitant interest rates, etc. If a buyer falls behind on payments, dealerships can repossess the vehicle and sell it again, perpetuating the cycle. The Times series cited examples of individual cars being resold up to eight times. And because their customers often have nowhere else to go, the dealerships continue to attract business, Van Alst said.

Former Kentucky Attorney General Greg Stumbo is one of the few public officials to successfully take on a Buy Here, Pay Here dealership. In 2004, Stumbo, who is now House Speaker in the Kentucky General Assembly, filed a lawsuit against J.D. Byrider, which touts itself as "the nation's largest buy here, pay here franchise dealership" on its website. The lawsuit alleged that the company violated a number of provisions in the state's Consumer Protection Act, including a failure to repair vehicle defects and improperly disclaimed warranties.

The lawsuit claimed the company's business model made customers "vulnerable to abusive sales tactics and is unlawful." There were reports of cars breaking down shortly after being purchased. Stumbo's office also received complaints that J.D. Byrider dealerships were charging extraordinarily high interest rates on high-mileage vehicles. Stumbo reached a settlement with the company, and about 10,000 customers received $500 refund checks, totaling nearly $5 million.

"When individual customers complained, they were treated rudely and offered no fair resolution. This was perfect for action beucase the buyers were mostly the working poor who could not afford to get relief on an individual basis," Stumbo told Governing. "Protecting lower income citizens is especially critical in these economic times."

Some states have statutes specifically related to used motor vehicle sales, but policies vary significantly. Some states place a cap on interest rates for used-car loans -- up to 27 percent in Iowa, for example, according to the Omaha World Journal -- and establish guildelines for the repossessions of automobiles. But Buy Here, Pay Here sales still go largely unregulated because they don't run their loans through financial institutions, as other used-car dealers do, and their customers are often uninformed about their rights, Van Alst said. It is uncertain who has authority over their operation, according to the Times, and some dealers don't register their financial operations with the state. For example, in Massachusetts, state regulators sent notices to 33 dealers in 2010 for lending without a license.

Many state used-car statutes are limited to warranty rights and preventing odometer fraud. Six states -- Hawaii, Massachusetts, Minnesota, New Jersey, New York, and Rhode Island -- have lemon laws for used cars, which establish a statutory period during which dealers are required to fix any problems that arise, according to NCLC's research. Nevada and New York require inspections to ensure used cars are roadworthy. Louisiana is the only state to prohibit self-help repossessions. A few states have laws that require dealers to provide consumers with a notice of default before repossessing a vehicle, according to the center's research. California passed a Car Buyer's Bill of Rights in 2006. The statute sets certain parameters for financing on used-car purchases. The law limits dealer markups on interest rates to 2.5 percent for loans of 60 months or less and 2 percent for longer loans.

Otherwise, only a broader consumer protection law, such as the one cited by Stumbo in his lawsuit against J.D. Byrider, might exist.

Comprehensive research has yet to be conducted on policies in all 50 states, but few, if any, states seem to have specific regulations for Buy Here, Pay Here dealerships, Van Alst said, based on his research. By contrast, 38 states have laws for regulating payday lending, another specialized industry centered primarily on customers with poor credit and characterized by high interest rates, according to the National Conference of State Legislatures.

Similarly, the federal Used Car Rule is generally limited to warranty information, and the Truth in Lending Act requires only that dealers provide certain information to consumers before making a loan. The Times series noted that, although Congress gave the newly formed Consumer Financial Protection Bureau authority over Buy Here, Pay Here dealerships, the bureau has not indicated that those businesses will be a focus of its efforts.

In his 2009 report, Fueling Fair Practices, Van Alst recommended some guidelines for states looking to strengthen their regulations for used-car dealerships in general, which he believes would also curb some of the predatory practices of some Buy Here, Pay Here dealerships:

  • Institute a right of rescission or "cooling off" period following motor vehicle sales.
  • Eliminate or limit dealers' ability to mark up finance charges.
  • Cap document preparation fees.
  • Ban or severely restrict self-help repossession. If permitted, require licensing and bonding and allow consumers the opportunity to cure a defaulted loan.

The table belows compares some key industry metrics of Buy Here, Pay Here car dealerships and payday lenders.

  Buy Here, Pay Here Payday Lending
Number of Locations 33,000 19,700
Annual Loans $80 billion $29 billion
Typical APR 20-25% 400%

Sources: CNW Market Research, Federal Deposit Insurance Corp., Los Angeles Times, Stephens Inc., Center for Responsible Lending