WASHINGTON – A federal judge in Washington has ruled that automobile dealers who engage in certain three-party financing transactions must disclose certain information to consumers who take out car loans if they are offered less favorable terms, such as a higher interest rate, than the most favorable terms available to the majority of consumers. When a lender relies on a credit report in setting an unfavorable interest rate, a provision of the Fair Credit Reporting Act requires lenders to provide notice to the consumer and provide instructions on how the consumers can obtain a copy of their credit history report and, if necessary, dispute and correct any false or incomplete data. One of the purposes of the statute is to provide consumers with information that might be helpful in preventing identity theft.
Judge Ellen Huvelle upheld the Federal Trade Commission’s (FTC) determination that auto dealers must comply with this provision even when they engage in “three-party” financing transactions, in which 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 the FTC rulemaking proceeding, the National Automobile Dealers Association (NADA) argued that auto dealers engaging in these transactions should be exempt from providing this notice. NADA argued that, when only this third party, and not the car dealer, actually obtains the credit report, then the car dealer should be exempt from providing any disclosures to the consumers. The FTC rejected this argument and concluded that the auto dealers actually use the credit report even if they do not physically obtain it, and so must provide the notice to consumers. NADA sued the FTC, challenging this interpretation. The court agreed with the FTC’s position in its ruling.
“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,” said Stuart Delery, Acting Assistant Attorney General for the Civil Division. “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.”
Under NADA’s interpretation, the consumer would never receive this disclosure – not from the dealer nor from the third-party finance company. In addition, all entities that extend credit to consumers could enter similar arrangements and thereby exempt themselves from giving consumers any disclosures relating to adverse information in consumer reports.
The Federal Trade Commission was represented in the case by Drake Cutini of the Consumer Protection Branch of the Justice Department’s Civil Division.