A closely watched California bill, aka the California CARS Act, aimed at tightening oversight of auto retail practices has advanced to its final committee in the California State Senate, carrying potential implications for how dealerships and auto lenders offer and disclose F&I products. A hearing on the bill, which was covered in our March and April editions of Industry Insights, will take place on May 23. If successful in that final committee, the bill would advance to the full Senate and then move to the Assembly for consideration.
Senate Bill 766 (SB766), known as the California Combating Auto Retail Scams (CARS) Act, was amended by the Senate Committee on Transportation and passed on April 8; it was amended again by the Senate Committee on Judiciary and passed on April 29. While much of the amendment activity focused on provisions affecting used vehicle sales, the revisions also modify regulatory language tied to the sale of vehicle service contracts, GAP waivers, and other add-on products.
Highlights of the California CARS Act Provisions Prior to Amendment
To demonstrate the scale of change intended by sponsors of the California CARS Act, we must return to the bill as it was introduced. Initially, SB 766 would have required, among other provisions, the following:
- A “clear and conspicuous” written disclosure, in the same language in which the contract negotiation took place, that an add-on product is optional.
- The consumer’s “express, informed consent” for the purchase of an add-on product.
- That no dealer may sell an add-on product which provides no benefit. The original bill specifically prohibited nitrogen filled tires, products “duplicative of warranty coverage”, and service contracts “void due to preexisting conditions,” among others.
- That dealers retain records demonstrating their faithfulness to the requirements immediately above for seven years. SB 766 explicitly names “copies of all service contracts, GAP agreements, proof of timely payment for add-ons, and calculations of loan-to-value ratios in contracts including GAP agreements.”
- That dealers keep a copy of certain records, including contracts for add-on products and all cancellation requests, for seven years.
- That dealers pay the add-on product’s benefit provider within ten days of the sale or lease of a vehicle.
The bill has been amended twice. The first amended version removed the statutory definition of “express, informed consent” and deleted examples of what would fail to meet that threshold—language that previously helped guide compliance for dealers and administrators alike. It also reduced the time for record-keeping mentioned above from seven years to two years. Finally, the revised bill included language clarifying that dealers are not prohibited from charging for add-on products or services—such as vehicle service contracts—provided those products are selected by, and would benefit, the buyer or lessee, even if the customer never uses them.
The most recent version of the bill, amended on April 29, retains the changes described above but extends the list of add-on products that provide no benefit to consumers to include the following.
- Service contract[s] [that do not] cover the reasonable costs of repair.
- Oil changes for electric vehicles.
- Duplicative service contracts that cover the same time period as the manufacturer’s warranty for another service contract.
- Catalytic converter markings for a vehicle that does not have a catalytic converter.
- Surface protection product that renders the manufacturer’s warranty for the paint job void.
For auto lenders, dealerships and F&I product companies, the California CARS Act reflects a continued push by state lawmakers to regulate perceived abuses in dealership practices, particularly around pricing transparency and F&I product disclosures. Readers may recognize many of these provisions from the Federal Trade Commission’s rulemaking commonly known as the CARS Rule that failed earlier this year after a challenge in the Fifth Circuit.
Auto lenders operating in the state may need to revisit processes that determine which F&I products are to be funded and product companies may need to revisit F&I product terms and dealer training protocols to stay ahead of potential compliance risks.
California CARS Act Bill page: Bill Status – SB-766 California Combating Auto Retail Scams (CARS) Act.
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The information provided in this post does not, and is not intended to, constitute legal advice; instead, all information, content, and materials referenced are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter.
