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A Costly Decision

July 2012, F&I and Showroom - Feature

by Gil Van Over - Also by this author

Sometimes smart people in positions of authority make stupid decisions when they fail to anticipate all the variables. A good example is a sales manager approving a deal when the salesperson has not fully disclosed that it’s a straw purchase. Well, the Federal Trade Commission (FTC) and a federal judge have apparently fallen into the same trap.

The agency and the judge are obviously smart people, but together they made a stupid decision to the detriment of car dealers. They took a rule that worked in the favor of both consumers and F&I offices, and turned it into another costly regulation.

At issue is the FTC’s interpretation of a dealer’s responsibility in providing notices to consumers as required by the Risk-Based Pricing Rule. The FTC interprets the rule’s use of the word "use" to mean that dealers have to provide customers with a notice disclosing their credit score, even if it wasn’t the dealership staff who pulled the credit report.

Here’s what the FTC wrote about the word "use" in the July 15, 2011, edition of the Federal Register: "The finance source, at the behest of the automobile dealer, has obtained the reports and performed underwriting and has told the automobile dealer the wholesale buy rate at which it will purchase the contract. The original creditor incorporated the wholesale buy rate in the rate offered to the consumer, establishing a causal connection between the consumer report and the ultimate rate offered to the consumer. The original creditor has therefore ‘used’ the consumer report."

That’s a loose connection at best, don’t you think? Well, the National Automobile Dealers Association thought so, too, and sued the FTC. Unfortunately, it lost the first round in what promises to be a heavyweight fight with the regulator.

In what the NADA calls a "flawed decision" — and, as someone who knows the business, I agree — the U.S. Court judge sided with the FTC’s insistence that since the dealer uses the credit score, it is the same as if the dealer pulled the credit report himself.

The NADA argued that the rule did not contemplate the word "use" the same way the FTC interprets it in requiring a dealership to provide the notice if it simply passed the credit application along to a third-party finance source. But the judge disagreed with the NADA, which filed a notice of appeal on June 15.

Until the appeal is heard, it certainly sounds like dealerships should provide a credit score-disclosure notice to every customer with whom it consummates a retail or lease deal, even if it did not pull a credit report.

Unfortunately, this means if you have been in the habit of submitting the credit app to the lender and getting an approval before signing the customer up, you will need to get the credit score from the lender and generate a manual notice. In other words, as the NADA accurately pointed out, you incur the unnecessary expense of pulling a credit report just so that you can provide the notice before consummating the deal.

This situation is unfortunate, because I had actually grown to like the rule’s intentions. For consumers, it offered a chance for them to check the accuracy of their credit report. For the F&I office, it provided producers with a chance to help customers make the best financial decision. Well, we can still do that; it’s just going to cost a little bit more. 

Gil Van Over is the president and founder of gvo3 & Associates, a national compliance consulting firm that specializes in F&I and sales compliance. E-mail him at

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