New dealer disclosure requirements under federal Finance Reform

New dealer disclosure requirements under federal Finance Reform

Adverse Action Notice & Risk-Based Pricing Notice Changes

A provision in the new federal Finance Reform Law (a.k.a. The Dodd-Frank Act) requires dealers and others who use credit scores in taking adverse action on consumer credit applications (such as a credit turn-down) to include new credit score disclosures in these notices beginning July 21, 2011. These include:

1) The consumer’s numerical credit score;

2) The range of possible credit scores under the model used to generate the score;

3) The key factors that adversely affected the consumer’s credit score in the model used;

4) The date on which the score was created; and

5) The name of the person or entity that provided the credit score.

Note that the new July 21 risk-based pricing notice disclosure requirement does not affect dealers who issue Credit Score Disclosure Exception Notices to comply with the Risk-Based Pricing Rule in lieu of a risk-based pricing notice.

The “key factors” explain the credit score and are provided by the entity that provides the score. Creditors must list up to four (4) key factors; however, if one of the key factors is the number of inquiries made with respect to that credit report, then the creditor must list up to five (5) key factors.

Holder in Due Course Rule Threshold Raised

Also effective July 21, 2011, the Holder in Due Course Rule will apply to retail installment sales contracts where the amount financed is $50,000 or less. The rule currently only applies to installment contracts with amounts financed in the amount of $25,000 or less. The rule requires dealers to include in their credit contracts a specific notice that lenders who buy the contracts are subject to the claims and defenses consumers may assert against dealers.

Truth-In-Lending Act Changes

Also effective July 21, 2011, the dollar threshold for consumer and lease transactions under Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing), will apply to all installment contracts where the amount financed or the total lease obligation is $50,000 or less. The current threshold is $25,000. As a result of this increase, a much larger portion, if not most, vehicle sale or lease contracts will be covered and open to “statutory damages” claims, above and beyond any possible actual damages. The Federal Reserve Board announced on June 13, 2011 that beginning January 1, 2012, the threshold will again be raised so that the protections of the Truth in Lending Act and the Consumer Leasing Act generally will apply to consumer credit transactions and consumer leases of $51,800 or less. This January 1 threshold increase comes per the provisions of the Dodd-Frank Act, which provide that on or after December 31, 2011, these thresholds must be adjusted each year by any increase in the consumer price index.

Collection of Information Regarding Small Businesses

This portion of the Dodd-Frank Act amends the Federal Equal Credit Opportunity Act and requires financial institutions and dealers to collect and report specific information concerning credit applications made by women-owned or minority-owned businesses and by small businesses. The purpose of the new requirement is “to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”

The compliance date for this provision will likely be extended beyond July 21, until rules can be adopted to implement it.