Risk-Based Pricing: Forms Available

COMPLIANCE DEADLINE 1/1/2011 IS FAST APPROACHING

The risk-based pricing rule, issued by the Federal Reserve Board and the Federal Trade Commission, requires any company that uses a credit report or score in connection with a credit decision – including auto dealers– to send notice to a consumer when, based on a credit report or score, we grant credit on “material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers”.

Auto dealers are required to provide a notice.  The Commentary to the Final Rule states, “The automobile dealer’s use of a consumer report to determine which third-party source is likely to purchase the retail installment sales contract and at what ‘buy rate,’ and to set the annual percentage rate based in part on the ‘buy rate,’ is conduct that fits squarely within the description of risk based pricing…Thus automobile dealers that are original creditors in a three-party financing transaction must provide risk-based pricing notices to consumers, in accordance with the rules.” Even if a dealer relies on a third party to pull a credit report, such as a lender, the dealer is still responsible for providing a notice.  Furthermore, the Rule allows lenders to delegate to dealers the lender’s responsibility for providing risk-based pricing notices to consumers.  We anticipate that lenders will do so. 

The final rules permit dealers and other lenders to provide a “credit score exception notice”.  The exception notice provides consumers who apply for credit with a free credit score and information about their score.  The credit score exception notice is much simpler than the risk based pricing notice.  We believe the vast majority of dealers will provide the credit score exception notice in lieu of the risk based pricing notice. 

We have enclosed a sample Credit Score Exception Notice and an Alternative Exception Notice for your convenience.  This sample notices will also be available on our website:  www.oada.com in the Compliance Information Quick Link.  Dealers are required to provide the “Alternative Exception Notice” if a customer does not have a credit score.

What should you do to comply with the Rule?

1.  Contact your DMS provider.  We understand that Dealer Track, Route One, and other providers are offering solutions. 
2. If your DMS provider does not offer an integrated solution which provides both the credit score information and the notice, dealers will need to contact a credit reporting agency to obtain the information needed to populate the Credit Score Exception Notice. 
3. Adopt a written Compliance Policy.  The Risk Based Pricing Rule provides that creditors are not liable for failing to perform the duties it requires, if at the time of the failure, the creditor maintained reasonable compliance policies and procedures.  While the Rule does not specify what the policy should contain, the National Automobile Dealers Association recommends that a policy should contain at least the following:
   1. A statement that, in consumer credit transactions where the dealer is either the original creditor or arranges financing for a finance source which is the original creditor and which contractually requires the dealer to deliver an Exception Notice, the dealer will deliver Exception Notices (or Alternative Exception Notices in appropriate cases) to consumer credit applicants as soon as reasonably practicable after the credit score has been obtained, buy in any event at or before consummation of the credit transaction;
   2. Appointment of a Compliance Officer who will be responsible for developing, implementing and overseeing the dealership’s procedures for complying with the Risk Based Pricing Rule;
   3. Procedures to ensure that the Exception Notice and Alternative Exception Notice contain the required disclosures and are presented to consumer credit applicants in a timely manner;
   4. Procedures mandating initial and periodic training to ensure that all relevant personnel, and any service provider to which related tasks are outsourced, are familiar with the Risk Based Pricing Rule and the dealer’s Compliance Policy;
   5. Procedures mandating periodic audits and specifying the retention of specific records to demonstrate the dealer’s compliance with the Compliance Policy. Records that should be retained include (i) initial and subsequent versions of the Compliance Policy and documents used in the process of creating the Policy; (ii) documents supporting the administration of the Compliance Policy, including training outlines, training attendance sheets, and audit records; and (iii) copies of the Exception Notices and Alternative Exception Notices provided to consumers.  The documents described in (i) and (ii) should be retained indefinitely, while the documents retained in (iii) should be retained for the full statute of limitations period under applicable federal law.  The statute of limitations under the Fair Credit Reporting Act can extend up to five years from the date of a violation.

Need more information?  DVDs of OADA’s webinar “Risk Based Pricing- A Dealer’s Guide to Compliance” are available for $20.00 by contacting DeAnna Zahniser at dzhaniser@oada.com or 614-923-2231, and NADA has published a guide on the Risk Based Pricing Rule which is available at www.nada.org. 

To download the samples of the Credit Score Notices, please click below

No Credit Score Notice - SAMPLE

Credit Score Notice - SAMPLE

If you have any questions, please contact Sara Bruce (x 108) or Charlie Howard (x110) with any questions regarding compliance with the Risk Based Pricing Rule at 614-766-9100.