The King of Credit

Camacho Auto Sales' mascot, a lion known as "The King of Credit," waves at traffic on Sierra Highway in Lancaster. (Christina House / For the Times / November 9, 2010)

Schwarz recalled the first sale he made to a Buy Here Pay Here dealer, in 1997. “He had a loaded .45 on his desk, a trailer and six cars on a gravel lot,” he said.

Since then, Schwarz's company, PassTime of Littleton, Colo., has sold more than 1 million GPS trackers and remote-control ignition blockers to 3,500 lots. Over the last two years, his company enjoyed a 40% increase in sales.

Like others in the industry, he sees a direct link between Buy Here Pay Here sales growth and the economy.

“Their credit is so bad they can't even get subprime financing, and they're going to be stuck in that hole for years, unable to get out,” Schwarz said of Buy Here Pay Here customers. “That's the profile.”

‘Totally surprised’

Bor Pha bought a 2004 Honda Odyssey with 70,000 miles from Yia's Auto Sales in Sacramento, a Buy Here Pay Here dealership that caters to the Central Valley's Hmong community.

The price was $13,000. The contract, handwritten in English, said she'd pay 12% interest on the loan. Pha said she trusted the dealer because he was a fellow Hmong and had sold her two cars in the past.

Late last year, she tried trading in the van at a different lot. The salesman looked at her contract with Yia's and determined that her monthly payment of $326.43 reflected a 20.3% interest rate, not the much-lower listed rate. The higher rate would cost Pha an additional $3,200 over the five-year term of the loan.

“I was totally surprised,” Pha, a factory worker, said through a translator. “I believed what the contract said.”

Another Hmong woman in Sacramento, Nou Lee, signed a similar contract, with a stated interest rate of 12%, but her payments reflected a 21.2% rate.

The two women sued Yia's in March, alleging that hundreds of other customers signed similar contracts. The dealership, in court filings, has denied knowingly misleading buyers. The suit is pending.

Daniel Costa, an attorney for Yia's, said some buyers may have been overcharged by mistake. He said the lot's owner, Yia Yang, is reviewing all sales from the last five years and will return any overpayments, with interest. Costa declined to say how many erroneous contracts had been identified.

“He has pledged to the community to make good,” he said.

There have been some crackdowns on Buy Here Pay Here dealerships. In 2004, an Ohio chain settled a federal class action for $21.8 million, paying up to $500 each to 123,000 customers who alleged they were misled about their loans. In 2006, the Kentucky attorney general reached a $7.4-million settlement with the nationwide J.D. Byrider chain to settle claims that it used deceptive sales practices, among other violations.

But such actions are rare.

Because Buy Here Pay Here businesses are both auto dealers and consumer lenders, it's not always clear who has authority over them.

Many don't bother to register their lending operations with state authorities. Last year, Massachusetts regulators sent notices to 33 dealers, citing them for lending without a license.

California doesn't recognize Buy Here Pay Here dealers as a distinct branch of the used-car business, and there are no regulations that apply to their unique practices.

The Federal Trade Commission has not prosecuted a major auto lending case in more than a decade, said Reilly Dolan, an assistant director of the FTC's division of financial practices.

“That hasn't been our focus, because it has been more of a problem for the states,” Dolan said.