Effective January 1, 2011, the FTC’s Risk-Based Pricing Rule imposes a new disclosure requirement on creditors. This new rule was motivated by a concern that, because consumers are entitled to “adverse action” notices under the Fair Credit Reporting Act only when they are denied credit (or reject a counteroffer for credit), consumers are not adequately apprised of the effect of credit reports on the pricing of credit.
TO WHOM DOES THE RISK-BASED PRICING RULE APPLY?
The Risk-Based Pricing Rule applies to 99.9% of all auto dealerships. If your dealership provides or arranges financing for your customers the Risk-Based Pricing Rule applies to you.
WHAT DOES THE RULE REQUIRE?
The Risk-Based Pricing Rule requires that dealerships provide either:
- A “Risk Based Pricing Notice” to those customers the company grants credit on “material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers.”
- A “Credit Score Disclosure Exception Notice” to all consumer credit applicants whether or not the consumer ultimately finances the vehicle.
Given the relative difficultly of determining precisely which customers received credit on “materially less favorable terms than the most favorable terms available to a substantial proportion of consumers”, it is much more practical to institute a blanket policy utilizing the Credit Score Disclosure Exception Notice for every customer.
WHEN MUST NOTICE BE GIVEN?
The consumer must receive the “Credit Score Disclosure Exception Notice” sometime prior to signing the retail installment contract.
WHERE CAN I OBTAIN THE “CREDIT SCORE DISCLOSURE EXCEPTION NOTICE” FORM?
Model forms can be obtained from the text of the final rule itself. You’ll want to skip towards the very end and locate the form titled “Model form for credit score disclosure exception for loans not secured by residential property.”
WHAT INFORMATION IS NEEDED TO COMPLETE THE FORM?
To complete the form you will need the following information:
- the consumer’s credit score,
- the reporting agency,
- the date the credit report was pulled,
- either a bar graph or percentage ranking of how the customer’s credit ranks among the general population.
BUT I NEVER OBTAIN THE CONSUMER’S CREDIT SCORE, THE BANK DOES!
Most lenders will provide all this information. If the lenders you use do not provide this information to you, you will need to contract with another source to obtain this information.
PENALTIES FOR NON-COMPLIANCE
The FTC can obtain injunctive relief and penalties of $3,500 for each knowing violation that is part of a pattern or practice of violations. There is no private right of action under the FCRA for violations but a violation of the Rule may provide a basis for bringing a private action under state law.
WHAT IF ONE OF MY EMPLOYEES FORGETS TO GIVE THE NOTICE?
Section 615(c) of the FCRA, 15 USC § 1681m(c), provides that a company cannot be held liable for a violation of the Risk-Based Pricing Rule if it can show by a preponderance of the evidence that it maintained reasonable procedures to assure compliance with the Rule. Thus, as long as you’ve got a system in place to assure compliance you’ll be fine.
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