The Exception is the Rule

The last holiday of the year is almost here. I know I’m looking forward to spending some quality time with friends and family. But before that holiday haze overcomes us, I want to throw out a little reminder about two new federal rules that will be kicking in at the end of the year. Hey, that’s my job, right?

First, the Federal Trade Commission (FTC)’s Risk-Based Pricing (RBP) rule goes into effect on Jan. 1, 2011. Two of my partners and I wrote a dealer guide on how to comply with the new rule, and I have to say, we ended up taking a somewhat unusual approach. 

You see, this is one case where you probably don’t want to comply with the actual rule. Instead, most of you will take advantage of the exception to the rule. So, in our guide, we started with how to use the exception and told readers they could stop there — that’s unless, of course, they were in need of a sleep aid.

See, the RBP rule requires creditors, to the extent they base an offer of credit on a consumer report, to give a specific notice to any applicant who is offered credit with “material terms that are materially less favorable than the most favorable material terms available to a substantial proportion” of your consumers. That means anyone who gets an adverse action notice doesn’t get a RBP notice. And don’t think you can just give a RBP notice to everyone — the rule does not permit that.

So, how the heck are you supposed to comply with this RBP rule? As you’ve likely realized, you can’t. I know some smart folks, and neither they nor I have conceived of a way for dealers — or most creditors, for that matter — to figure out who gets a RBP notice without a very sophisticated and very expensive system. So, we tell most of our clients not to even try to comply with the RBP rule. Instead, we tell them to comply with the exception to the rule.

The exception is quite simple and operationally easy. You simply need to give all of your customers who apply for credit a credit score disclosure notice. The form of the CSD notice is prescribed in the RBP rule and contains, among other required language, a disclosure of the consumer’s actual credit score, as well as information about how his or her credit score stacks up against other consumers in the same scoring pool. Consumers for whom no credit score is available get a different notice that basically describes what a credit score is and why it’s important. We’ll call this notice the “NCSA notice.”

The beauty of this approach is that you don’t need to jump through hoops to figure out which customers get a RBP notice. However, it does mean that, to the extent a consumer report is used in decisioning a credit applicant, you need to give a proper and complete CSD notice to consumers with a credit score and a NCSA notice to those without one. And don’t think you can simply call your finance sources for these notices. Unfortunately, this is all on you.

The second beauty of this approach is that you can get the CSD or NCSA notices from the bureaus. Some of your DMS providers or other platforms like DealerTrack and
RouteOne are likely to have a solution that will work for you. So, you’ll have plenty of options and no excuses for not being in compliance by Jan. 1.

The second rule coming down the pike is the ever-present and oft-delayed Red Flags Rule. The FTC is expected to release its self-imposed moratorium on enforcement on Dec. 31, so it will be fair game should you find representatives of the commission in your store. 

The FTC could delay enforcement yet again, but rumor has it that the part of the Fair and Accurate Credit Transaction Act that mandated the Red Flags Rule will be amended by Congress to fix what it perceives as its unintended scope (i.e., it’s applicability to doctors, lawyers, accountants, plumbers, housekeeping services, etc.). Now, don’t get excited. Whatever the fix is, it will have no impact whatsoever on your need to comply with the rule.

All this compliance business can be daunting. But in today’s environment, Congress, like I always say, is the gift that keeps on giving, and not necessarily in a good way. Let’s hope the gifts from your family and friends are more appealing and better appreciated.

Michael Benoit is a partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and writer on a variety of consumer credit topics. E-mail him at [email protected]. Nothing in this article is intended to be legal advice and should not be taken as such. Please direct all legal questions to your counsel.