July 21, 2011 marked an important date for auto dealers and consumer creditors generally. It was the one-year anniversary of the signing of the Dodd-Frank Act as well as the “designated transfer date” for consumer protection law regulatory authority to be transferred to the new Consumer Financial Protection Bureau (“CFPB”). 18 different laws, including the Truth in Lending Act, Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, and most of the Fair Credit Reporting Act are now subject to the CFPB’s jurisdiction to write rules and bring enforcement proceedings. The CFPB must also issue regulations prohibiting “unfair, deceptive, or abusive practices (“UDAAPs”),” the scope of which have yet to be determined.
For auto dealers, franchised dealers will continue to be regulated by the FTC. The FTC will act in conjunction with the CFPB for new rules the CFPB puts out, including the UDAAP rules when they are published. However, the CFPB will not have any supervisory authority (the ability to come in and do an audit) over franchised dealers. Independent and buy-here-pay-here dealers will be subject to both the regulatory and supervisory authority of the CFPB. The CFPB has already established a website for consumers to file complaints against auto dealers and other creditors.
Additionally, the FTC now has streamlined authority to write regulations affecting auto dealers. Since 1977, for the FTC to issue regulations against auto dealers for unfair or deceptive practices (“UDAPs”), the law required a multi-stage process including hearings, Congressional reports, and a written finding that the prohibited acts were “prevalent” in the auto industry. It took close to 7 years for the FTC to wade through the process and few such rules were written. The Used Car Buyer’s Guide Rule is the only one that comes immediately to mind.
Now, however, the FTC can publish regulations relating to auto dealers the same way as any other federal agency issues regulations under the Administrative Procedures Act. Simply publish proposed regulations, take comments for 60-90 days, and then issue final regulations, a process that may take about a year. Anticipating this authority, the FTC has already held two fact-finding roundtable hearings on auto sales and financing practices to consumers. It is expected that the FTC will use its new authority to issue regulations on practices like spot deliveries, marking up of buy rates, financing to military members, payment packing, and deceptive advertising. Other practices may also become more tightly regulated by the FTC.
For auto dealers now, two important changes have taken effect, one relating to adverse action notices and another to dealers who give credit score disclosure notices to comply with the Risk-Based Pricing (“RBP”) Rule that took effect January 1, 2011.
For adverse action notices, the change is that new information relating to the customer’s credit score must be included on the notice if a credit score was used in any way in making the credit decision. The new disclosures must include:
- the consumer’s credit score used;
- the date the score was created;
- the credit bureau or other entity that provided the credit score;
- the range of credit scores in the scoring model; and
- up to 4-5 “key factors” that caused the credit score to be lower than it would otherwise have been. Up to 4 reasons must be disclosed unless one of the reasons is number of recent credit inquiries in which case up to 5 reasons must be disclosed.
The FTC also clarified which consumers must get credit score disclosure notices under the RBP Rule. As initially written, the RBP Rule required pulling of a consumer report as the trigger for giving the notice. Many dealers who simply send along credit apps to lenders without pulling a credit score were not required by the Rule to give a credit score disclosure notice to the consumer.
In amending the RBP Rule, the FTC made it clear that every applicant for credit must get a credit score disclosure notice unless an exception applies, even if the dealer did not pull a credit report on the customer. The notice must be given “as soon as reasonably practicable” after the dealer gets the credit score but before the deal is closed. FTC commentary indicated that three business days would be acceptable. The net effect will be that certain dealers will have to buy credit scores just for the purpose of giving the consumer a credit score disclosure notice.
The most relevant exception is that if the dealer sends a customer an adverse action notice, it does not need to give the customer a credit score disclosure notice too. But there’s a catch: You may not know early on (“as soon as reasonably practicable” after pulling the credit score) whether you will get the customer financed. You may think not but then find a willing lender during the ensuing days or weeks. You have up to 30 days to decision a credit application and send an adverse action notice if you can’t get the customer financed. So if on day 20 you find a lender to finance the customer but have not given the credit score disclosure notice, you will be out of compliance with the RBP Rule because any credit score disclosure notice given then will be untimely.
A best practice is to give every credit applicant a credit score disclosure notice as soon as possible after pulling their credit score. This will ensure compliance with the RBP Rule. It also will create a single and simplified process for your sales and F&I staff and not require them to guess customer-by-customer whether or not to send the notice. The easier the process, the better. There is no legal downside to a consumer ultimately getting both the credit score disclosure notice and an adverse action notice later on. So keep it simple and give every credit applicant a credit score disclosure notice regardless of whether you can ultimately get them financed.
If you pull your credit reports through DealerTrack, DealerTrack will give you a customized credit score disclosure notice and an adverse action notice containing all the required information for the customer with the customer’s credit report. There is no charge for this service but it does require you pull the credit bureau through DealerTrack so we can get the necessary information.
New rules, new players, new risks. Work on getting your processes for RBP Rule credit score disclosure notices and adverse action notices down first. Those are in effect today. There may be some delay before UDAAP (CFPB rule) and UDAP (FTC rules) are issued or take effect. But be mindful that auto dealer compliance is very much on the front burner in Washington.
Randy Henrick is Associate General Counsel and lead Compliance Counsel for DealerTrack, Inc. This article is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations from a knowledgeable attorney or compliance professional licensed to practice in your state.