Way back in December of 2003, President George W. Bush signed into law the “Fair and Accurate Credit Transactions Act of 2003” (FACTA), which made significant changes and amendments to the “Fair Credit Reporting Act” (FCRA). Dealers felt the impact of this law most recently with the implementation of the Red Flags Rule. Come January 1, 2011, another rule mandated by FACTA, the Risk-Based Pricing Rule (RBPR), will change the way dealers handle their financing transactions by requiring them to provide many of their consumer customers with a “risk-based pricing notice.”
Risk-based pricing refers to the practice of setting or adjusting the price and other terms of credit offered or extended to a particular consumer to reflect the relative credit risk that consumer represents. In general, risk-based pricing happens when a dealer offers more favorable terms to consumers with better credit histories and less favorable terms to consumers with poorer credit histories, e.g., in accordance with pricing tiers on a finance source’s rate sheet.
Dealers must provide a risk-based pricing notice to consumers for whom they use a consumer report in connection with “an application, grant, extension, or other provision of credit and, based in whole or in part on the consumer report, grants, extends, or provides 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” the dealer. According to the Federal Trade Commission (FTC), the RBPR (which it wrote in concert with the Federal Reserve Board) 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 complements the existing FCRA adverse action notice provisions and, like those provisions, permits consumers who receive the notice to obtain a free copy of their credit report. Unlike adverse action notices, however, only consumers approved for credit receive the risk-based pricing notice, and then, only if they don’t get more favorable terms than a significant number of the dealer’s other customers.
To the extent any dealers are unclear that the RBPR applies to them (as opposed to their financing sources) the FTC provides a specific example:
“If the auto dealer is the person to whom the loan obligation is initially payable, such as where the auto dealer is the original creditor under a retail installment sales contract, the auto dealer must provide the risk-based pricing notice to the consumer…even if the auto dealer immediately assigns the loan to a bank or finance company. The bank or finance company, which is an assignee, has no duty to provide a risk-based pricing notice to the consumer.” 16 C.F.R. 640.6(b)(3).
There are some alternative notice options that dealers may find more appealing than the general notice requirement. Whatever a dealer decides, it should discuss its compliance obligations with counsel. Like all federal rules, it’s more complicated than it appears.
Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. Michael can be reached at 202-327-9705 or [email protected] Nothing in this article is intended to be legal advice and should not be taken as such. All legal questions should be addressed to competent counsel.
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