I was recently at a dealership where soft credit pulls were being discussed. Management was excited about pulling customer credit for less cost, and without regulatory issues.
“Without what?” I asked. In response, the F&I manager explained that on a soft pull, the dealership did not have to worry about adverse action notices or other regulations.
I asked where that information came from. I was not surprised to hear the advice had come from the individual selling soft pulls. We then discussed how the dealership intended to use the reports, and why what they were led to believe about soft pulls and compliance issues was incorrect.
More and more—and way too often—dealership personnel are taking compliance advice from vendors trying to sell products. Often this free compliance advice is incomplete, inaccurate, and in the case of the soft credit pulls, flat-out wrong.
Regardless of whether a credit report is a soft or hard pull, it remains a consumer report. Here’s what the federal record (603d FCRA) says about the matter:
The term “consumer report” means any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for: (A) credit or insurance to be used primarily for personal, family, or household purposes . . . .
In this business, the facts matter
A soft inquiry occurs when a person or company checks an individual’s credit report as a background check, you check your own credit score, or a lender preapproves you for a loan. Soft and hard inquiries are different because:
- Soft inquiries can occur without the consumer’s permission, and rarely affect a person’s credit. A hard inquiry occurs when a prospective lender checks a credit report to make a lending decision.
- Hard inquiries commonly take place when consumers apply for a credit card, auto finance, mortgage, or other loan.
Despite differences between a soft and hard pull, a dealership must have a permissible purpose to pull a consumer’s credit under either scenario. Section 604 of the Fair Credit Reporting Act provides, in part:
§ 604. Permissible purposes of consumer reports
(a) Subject to subsection (c), any consumer reporting agency may furnish a consumer report under the following circumstances and no other (emphasis added):
(2) In accordance with the written instructions of the consumer to whom it relates.
(3) To a person which it has reason to believe: (A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer, or . . . (F) otherwise has a legitimate business need for the information . . . (i) in connection with a business transaction that is initiated by the consumer; or (ii) to review an account to determine whether the consumer continues to meet the terms of the account.
The devil is in the details
Why would a dealership use a soft credit pull on a customer? It is not checking the consumer’s background, nor is it pulling a report out of curiosity.
Despite what the dealership calls the report, it is being pulled to determine the customer’s creditworthiness to purchase and finance a vehicle. The report, regardless of what one calls it, is being obtained in order to make a credit decision.
Assuming all is well with the customer’s credit, a vehicle will be purchased and financed, and everyone is happy. What happens, however, when the F&I manager looks at the soft pull and decides credit cannot be extended because of the customer’s low credit score?
That person is told the dealership cannot provide credit given his or her current credit situation. In other words, the customer is being turned down.
A credit decision adverse to the customer has been made based upon the information in the soft pull. Therefore, the dealership must provide an adverse action notice to the consumer.
The FCRA does not differentiate between a soft pull and a hard pull. Section 615 of the act states:
615. Requirements on users of consumer reports
(a) Duties of users taking adverse actions on the basis of information contained in consumer reports. If any person takes any adverse action with respect to any consumer that is based in whole or in part on any information contained in a consumer report, the person shall (1) provide oral, written, or electronic notice of the adverse action to the consumer.
The FCRA does not say adverse action notices must be provided only in the case of a hard credit pull. It says an adverse action notice must be provided where the decision is “based in whole or in part on any information contained in a consumer report.”
This means that the soft pull you just got on the customer sitting across from you is a consumer report. Don’t make the mistake of thinking it allows for some sort of shortcut.
Remember: The decision to not offer a customer credit based upon the information in a soft pull is an adverse action that requires you to provide the customer appropriate adverse action notice—under both the FCRA and Equal Credit Opportunity—in a timely fashion.
David R. Missimer, [email protected], is general counsel for Automotive Compliance Consultants Inc. He spent 28 years in private practice as a litigator representing lenders, auto dealers, and numerous other entities and individuals. He has worked with Dealership Compliance issues since 2003 as co-founder of ACC. He is a member of the National Association of Dealer Counsel, American Financial Services Association, and National Automotive Finance Association.