Way back in 2003, Congress passed the Fair and Accurate Credit Transactions Act (FACTA). For us lawyers, it’s the gift that keeps on giving. It just gave again with the recent proposal for the last of the major rules it mandated. This rule would implement FACTA’s requirement for creditors, including powersports dealers who provide financing, to provide a consumer with a so-called “risk-based” pricing notice when a consumer is offered credit on terms less favorable than what’s available to other consumers. The rule also mandates that you notify the applicant that you’ve obtained a credit score or consumer report.
The proposal asks that the notice be provided when a dealer offers or provides “credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that person.” I know that’s a mouthful.
The proposal requires the original creditor to give the risk-based pricing notice in most situations. If you’re providing installment sale financing, this means you, and no, this is not some new change in your status in the transaction. When you enter into a retail installment sale transaction with your customer, you are the original creditor under every legal theory I can think of. Under this proposal, you are the person required to give the risk-based pricing notice.
This rule has been on the horizon for a long time, mostly because the two agencies tasked to write it — the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) — couldn’t agree on how to do it. One advocated a more general notice, while the other one wanted a customer-specific notice. The solution? They split the baby.
The proposed rule provides two ways to give the notice — a customer-specific notice to certain credit applicants, or a more general notice to all credit applicants. If you choose to give a customer-specific notice, you can give it to consumers with credit scores below the score that represents about 60 percent of your credit customers, or to consumers who do not qualify for the lowest- or lower-priced tiers. This notice has to be given after the terms of the credit have been set, but before the consumer becomes contractually obligated on the contract.
Alternatively, you can opt for a more general notice to give all credit applicants. This notice must be provided as soon as reasonably practicable after obtaining the consumer’s credit score. It would include the consumer’s actual credit score plus a bar chart or other means of explaining how the consumer’s credit score compares to the scores of other consumers. The dealer must also identify the consumer reporting agency that provided the score and other information.
Since this is a proposed rule, it was subject to a public comment period that ended Aug. 18. As you might imagine, the FRB and the FTC expected a large number of comments, and I expect many powersports and auto dealers had something to say as well. So will consumer groups, finance companies, banks and just about any other creditor subject to the rule. There’s a lot not to like, no matter which side you’re on. We’ll continue to keep tabs on the outcome of the proposal. So stay tuned.
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. He can be reached at [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.