Federal Judge Rules Against NADA in Consumer Credit Notice Case
By Nick Zulovich, Editor
May 25, 2012
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WASHINGTON, D.C. — A federal judge ruled against the
National Automobile Dealers Association this week in court proceedings debating
who should inform potential buyers about how credit history can be used to
determine an auto loan's interest rate.
NADA's case versus the Federal Trade Commission is focused on a challenge of the federal agency's interpretation of the meaning of "uses a consumer report" in the amended Fair Credit Reporting Act.
U.S. District Judge Ellen Segal Huvelle decided dealers who use consumers' poor credit histories to charge them more interest on vehicle loans must tell buyers they have negative information on their credit report — even if the loan is generated through a commercial bank or captive finance company.
NADA told SubPrime Auto Finance News in a statement Friday that it challenged the federal agency's broad interpretation of the scope of the federal Risk-Based Pricing Rule.
Association officials believe the law that the rule implements (section No. 311 of the Fair and Accurate Credit Transactions Act of 2003) applies to persons who, among other requirements, "use" a credit report in particular credit transactions.
NADA indicated the FTC issued an interpretation last July stating that dealers engaged in three-party vehicle financing transactions who do not obtain, receive or review a credit report nevertheless "use" a credit report based on the finance source's use of a credit report and therefore are responsible for complying with the Risk-Based Pricing Rule's notice requirement.
"Believing this interpretation to be flawed, unnecessary and burdensome to many dealers by requiring them to purchase credit reports for no purpose other than to comply with the Risk Based Pricing Rule, NADA subsequently initiated this challenge," officials stated.
In its complaint, NADA argued that Congress never intended the word "use" to extend to this subgroup of dealers and that the FTC lacked authority to issue such an interpretation.
Although the court found that the statute is capable of supporting NADA's interpretation, the association pointed out Huvelle said the FTC possessed authority to issue its interpretation and that its interpretation is reasonable.
"Regardless of which party prevailed at the district court level, NADA anticipated that the other party would appeal the District Court decision to the D.C. Circuit Court of Appeals. NADA will now direct its outside counsel to commence the appeal," association officials said.
Huvelle wrote in her decision that as set forth in a preamble to amended regulations related to risk-based pricing of consumer credit, the FTC declared that a dealer that does not obtain a consumer report nonetheless "uses" it when the dealer executes a credit contract based upon a third-party financing source's use of the consumer report.
The judge dismissed NADA's contention this interpretation violates the Administrative Procedure Act.
Stuart Delery, Acting Assistant Attorney General for the Civil Division at the U.S. Department of Justice, applauded Huvelle's decision.
"This ruling will make it easier for consumers to learn about unfavorable information in their credit reports. Not only will this give them an opportunity to correct any inaccuracies, but it also provides a key tool needed to combat identity theft or fraud," Delery said.
"The auto dealer is in the best position to provide this information because the dealer interacts directly with the consumer and establishes the credit terms in the agreement that it enters with the consumer," Delery added.
More Case Background
Huvelle shared plenty of legal history when explaining her ruling from the District Court of the District of Columbia.
The judge recapped that Congress enacted the Fair and Accurate Credit Transactions Act of 2003, to "prevent identity theft, improve resolution of consumer disputes, improve the accuracy of consumer records, and make improvements in the use of, and consumer access to, credit information."
Huvelle stated the FACT Act amended the FCRA by adding, among other things, a provision that governs the "duties of users in certain consumer credit transactions."
The judge wrote, "That provision addresses a practice known as ‘risk-based pricing' and provides statutory protections for consumers who, based on information contained in their consumer reports are offered credit at materially less favorable terms than the most favorable terms available to a substantial proportion of consumers.
"In such circumstances, prospective buyers are entitled to receive a risk-based pricing notice (RBPN) alerting them to the potential existence of negative information in their credit reports so that they can check their credit histories and correct any inaccuracies," Huvelle continued.
"Specifically, the creditor must explain that information in the credit report was a factor in setting the unfavorable interest rate, how the consumer can obtain his or her credit history report, and how to correct false or incomplete data," the judge went on to write.
Prior to the 2003 amendment, Huvelle explained, consumers were not entitled to receive such notice upon receiving less favorable credit terms. She indicated they only received notice for more drastic adverse actions such as denial of a loan.
"These RBPNs must be provided to consumers by ‘any person' who uses a consumer report in connection with an application for, or a grant, extension, or other provision of, credit," Huvelle emphasized in her ruling.
That's the point that NADA debated while bringing its action against the FTC.
Huvelle acknowledged NADA and two other associations submitted letters in which they argued that dealers should be exempt from providing an RBPN when they engage in three-party financing transactions — when the dealer agrees to extend financing to a consumer and then immediately assigns the loan to a third party such as a bank or finance company.
"In these circumstances, NADA explained it is the third-party financing company, and not the dealer, that does the risk-based pricing for it is the financing company that evaluates the consumer's credit and proposes a wholesale interest rate (the buy rate) at which it will underwrite the auto loan," the judge recapped.
Huvelle noted the dealer relies on the buy rate to offer the consumer a loan at a higher retail interest rate than is available to buyers with better credit histories.
"Therefore, NADA argued the obligation to provide the RBPN should fall on the financing sources that set the risk-based price and not on the auto dealers," the judge wrote.
However in January 2010, the FTC adopted the Fair Credit Reporting Risk-Based Pricing Regulations.
In the final regulations, Huvelle said federal officials addressed — and rejected — NADA's argument, concluding that an initial creditor, such as a dealer, must provide the RBPN within the context of three-party transactions.
"Specifically, the Federal Trade Commission took the position that auto dealers that are original creditors are considered to use the credit reports to determine which third-party financing source to approach for financing, even if they do not set the risk-based price, and therefore fall within the purview of (the regulation)," the judge wrote.
A year later, Huvelle pointed out that a few days after these rules took effect, NADA sought formal guidance from the FTC on whether this requirement applied to dealers that are initial creditors in three-party transactions and do not obtain a copy of the credit report but instead, they leave it to the financing sources to obtain one.
"In this circumstance, the financing source usually obtains the consumer report, but the auto dealer does not and therefore, NADA argues, the dealer cannot be said to use the credit report," Huvelle indicated.
For Huvelle's complete opinion on NADA's case against the FTC, visit this webpage.
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