As if you didn’t have enough rules and regulations in your life…
The Next Big Thing from our friends at the FTC and Federal Reserve is known as Fair Credit Reporting Risk-Based Pricing Regulations.
According to the agencies, “the risk-based pricing notice requirement is designed primarily to improve the accuracy of consumer reports by alerting consumers to the existence of negative information on their consumer reports so that consumers can, if they choose, check their consumer reports for accuracy and correct any inaccurate information. It is meant to complement the existing adverse action notice provisions of the Fair Credit Reporting Act”. How’s that for a mouth full? These rules generally require a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor.
Yep, you guessed it, auto dealers are considered creditors.
Well, we tried…
In seeking an exemption from the rule for dealers, industry associations responded that in three-party financing transactions, automobile dealers are not engaged in risk-based pricing and therefore should not be subject to the requirements of the rules. Although the dealer obtains a consumer’s credit report in a three-party financing transaction, it does so in order to determine which third-party creditors to send the consumer’s credit application, and not to set the terms of the retail installment sale contract. Accordingly, the automobile dealer is not engaged in risk-based pricing because it is the third-party creditor, not the dealer, who analyzes the consumer’s credit-worthiness.
Unfortunately, the regulators disagreed. Thus, automobile dealers that are original creditors in a three-party financing transaction must provide risk-based pricing notices to consumers, in accordance with the rules.
While the rules don’t become effective until January 1, 2011, here’s a short synopsis of what to expect:
• A risk-based pricing notice is to be provided to the consumer after the terms of credit have been set, but before the consumer becomes contractually obligated on the credit transaction.
• The rules apply to the person to whom the obligation is initially payable (also referred to as “the original creditor”).
• The risk-based pricing notice must contain a statement informing the consumer that he or she may obtain a copy of a consumer report, without charge, from the consumer reporting agency identified in the notice.
Because it may be difficult to determine which consumers must receive the notice, the rules also include certain exceptions:
1. When a consumer applies for, and receives, specific material terms.
2. Creditors may provide consumers with a credit score disclosure in lieu of a risk-based pricing notice. This may be good news for California dealers who are already required to provide a credit score disclosure under the Car Buyer Bill of Rights, although the current form may have to be modified to include additional information that provides context for the credit score disclosure.
3. When a consumer has been or will be provided a notice of adverse action under in connection with the transaction.
4. In some cases, a consumer’s credit file may not contain sufficient information to permit a consumer reporting agency or other person to calculate a score for that individual. In those cases, a creditor using either of the credit score disclosure exceptions described above is permitted to comply with the rules by providing an alternate narrative notice that does not include a credit score to those consumers for whom a score is not available.
We’ll keep you posted as the launch date gets closer.
Jim Radogna is the President of Dealer Compliance Consultants, Inc., a San Diego, California training and consulting firm.