What You Need to Know About Dodd-Frank

As of July 21, auto dealerships can expect their state attorney general’s office to step up its investigations of any reported irregularities in dealership F&I processes and/or surprise audits to determine dealership compliance to Truth in Lending Act regulations.

The Dodd-Frank Act, now in effect, gives the Federal Trade Commission (FTC) new rule-writing authority over unfair and deceptive practices, and is pushing this authority to state’s attorneys general. Given this new authority, expect your state’s attorney general to take its increased power and authority seriously.

As a result, the financial compliance cops will be eyeing auto dealerships hungrily as states seek to ferret out violators, not only with a wink toward consumer protection but as a means for raising funds for cash-strapped state governments.

To remain clear of the violation hunters, be sure the dealership handles risk-based pricing and adverse action notices correctly. Dodd-Frank requires a few specific changes to these documents, including the addition of:

  • A numerical credit score used in making the credit decision

  • The range of possible scores under the model used

  • Up to four factors (up to five if the number of inquiries made is a factor) that adversely affected the credit score of the consumer in the model used

  • The date on which the credit score was created; and,

  • The name of the person or entity that provided the credit score and contact information

In review, these key notices are:

  • Adverse Action Notices:

    Must be sent to anyone who applies for credit and is denied or when the terms are different from that requested. In most situations, the bank with which the dealership has pursued financing for the customer will produce and distribute this notice. In situations where the dealer makes the credit decision or denies credit without shopping the application to a bank or finance company, however, the dealer is required to take the action.

  • Risk-Based Pricing Notices:

    Dealers are required to provide a risk-based pricing notice to customers who receive credit on material terms that are less favorable than terms offered to a substantial portion of their customers. In the alternative, an Exception Notice must be delivered to all customers that request credit from the dealership prior to the agreement being entered into.

Auto dealers had hoped that the final version of the Dodd-Frank Act would exclude auto dealerships but the rules finalized July 5 did not. The Obama Administration, replying to earlier efforts to have dealerships excluded, made it clear it was not happy with that exclusion. Commenting then, Mr. Obama had said, the “exemption would allow them [dealers] to inflate rates, insert hidden fees into the fine print of paperwork and include expensive add-ons that catch purchasers by surprise.

Dodd-Frank applies to franchised and independent dealerships differently. Dealers who extended retail credit or lease directly to consumers and do not assign their contracts, such as buy here/pay here, are subject to the jurisdiction of the Consumer Financial Protection Bureau, created by Dodd-Frank. Only those dealerships that predominately engage in the sale, leasing, or servicing of motor vehicles and assign their contracts to an unaffiliated third party are exempt. 

Don’t read the above as meaning an “out” for your dealership, however. Dealers are still subject to Dodd-Frank and can expect their state attorney’s office to keep its investigators busy looking into auto dealership practices. Now is the time to have your adverse action and risk-based pricing notices reviewed and updated.

Former dealership owner and operator Terry Dortch is president of Automotive Compliance Consultants, Crystal Lake, IL, a firm providing F&I, OSHA, EEO and other compliance audit, training and investigation services for auto dealers. He can be reached at www.compliantnow.com or terry_dortch@compliantnow.com.

Terry Dortch


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