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Compliance is crucial in the auto industry, and it starts with educating your employees about the Fair Credit Reporting Act
You’ve worked in the auto industry for quite a while now, and after all these years, you probably feel like you have a good handle on all the different rules, acts, and laws that your dealership is required to follow. Compliance is of the utmost importance — and you get that.
Are you sure that your entire staff does, though?
Salespeople come and go, and as you know, it’s not uncommon to hire individuals who have never even sold cars before. You need to make sure you are continuously training your team and drilling compliance into their heads; it’s essential for the safety of your customers and the future of your dealership.
A good place to start is by holding a training session to teach your staff about the Fair Credit Reporting Act. Use the summary below to develop a lesson plan — it covers all the main points your employees need to know.
What is the Fair Credit Reporting Act?
The Fair Credit Reporting Act is a federal law, and it governs how your dealership handles consumer credit information when the top of financing comes up. It was originally enacted in 1970 to prevent the misuse of sensitive consumer information, improve the accuracy of consumer reports, and promote the efficiency of the nation’s banking and consumer credit systems.
As someone who reports information about consumers to consumer reporting agencies, you have a few responsibilities:
- Provide accurate information
- Correct and update information
- Take appropriate steps after receiving a notice of a consumer dispute from a consumer or a consumer reporting agency
- Report voluntary account closings
- Accurately report delinquencies
- Let the consumers know the names and addresses of any sales finance companies where you might shop their contract
- Securely dispose of the consumer’s credit report once it is no longer needed
The Fair Credit Reporting Act works in conjunction with other laws, including the Gramm-Leach-Bliley Act and the Red Flags Rule.
When Auto Dealerships Can Request a Consumer’s Credit Report
Part of the Fair Credit Reporting Act provides clear clarification for auto dealerships regarding when they can and cannot obtain a consumer report:
“When the consumer expresses an interest in buying a car on credit, there would be a permissible ‘credit’ purpose under section 604(a)(3)(A). If the dealer gets the consumer’s written consent, there is clearly a permissible purpose under section 604(a)(2).”
You can run a credit report when customers tell you that they want to pay for a vehicle using a personal check or if they ask you about credit options to finance a particular purchase.
You cannot run a credit report when a customer is window shopping, if you want to know whether it’s “worth it” to spend time with a specific customer, or to respond to general questions about available products or financing. You also cannot run a credit report if someone asks to test drive a vehicle.
The underlying idea is that you should not look into a consumer’s credit until he or she demonstrates an intent to purchase or lease a vehicle or he or she signs a paper saying that you can check his or her credit. Never just assume.
Adverse Action Notices and the Fair Credit Reporting Act
An adverse action notice is required when a credit decision is based on information contained in a consumer report and:
- Credit is denied
- Credit is not submitted for approval only based upon an application
- Credit isn’t granted upon the terms requested, and a counter-offer isn’t accepted
- The deal falls through at a later date due to a lack of a funding source
The only situation in which you wouldn’t need to issue an adverse action notice is if your dealership doesn’t participate in credit decisions and only accepts applications and refers applicants to creditors.
What Can Happen if You Don’t Comply with the Fair Credit Reporting Act
The Federal Trade Commission (FTC) is tasked with enforcing the Fair Credit Reporting Act, and they take their job very seriously. In September 2015, the loan-servicing arm of a Texas-based auto dealer was hit with over $82,000 in civil penalties. The FTC charged the dealership with failing “to have written policies and procedures regarding the accuracy of reported credit information” and failing “to properly investigate disputed consumer credit information.”
Though it appears that the dealer in Texas was quite brazen in ignoring the Fair Credit Reporting Act, even well-meaning employees can slip up by:
- Forgetting to give an adverse action notice when a consumer’s application for credit is denied.
- Tossing a print-out of a consumer’s credit report into the trash without shredding it or making it completely illegible.
- Running a credit check on someone who schedules a test drive just to make sure he or she can afford the car if he or she decides to buy.
Failure to comply with the Fair Credit Reporting Act can result in your dealership being sued by the FTC, the Consumer Financial Protection Bureau, state governments, and in some cases, consumers. Currently, maximum penalties are set at $3,500 per violation in the case of lawsuits brought by the FTC. This means that if all of your salespeople do not realize they need to issue adverse action notices, you could be hit with a $3,500 penalty for every single time someone messed up.
You may be able to skate by with a few unnoticed violations, but they will eventually catch up with you if your team is not careful.
How will you find out if you’ve violated the Fair Credit Reporting Act? You’ll know when the FTC comes knocking at your door.