When Dealers Have Permissible Purpose to Pull a Credit Report

January 14, 2009 | No Comments | share on facebook | retweet | share on LinkedIn

by David Medine, Associate Director, Division of Credit Practices, FTC

 

Re: Section 604 of the Fair Credit Reporting Act

Dear Ms. Coffey:

This responds to your letter dated August 29, 1997, asking the views of the Commission staff on a number of issues concerning application of the amended Fair Credit Reporting Act ("FCRA"), including (1) the propriety of an auto dealership obtaining a consumer report from a consumer reporting agency ("CRA") on an individual who visits the showroom, (2) the disclosure required to be provided to a job applicant or current employee before a consumer report may be obtained by the employer, and (3) the items required to be provided to the consumer before adverse action may be taken by the employer based on the report.

1. Section 604(a)(3)(F) permits CRAs to provide consumer reports to any party who has a "legitimate business need for the information in connection with a business transaction that is initiated by the consumer." You ask whether this provision allows a dealer to obtain a consumer report on a person who "comes to an automobile dealership and requests information" from a salesman about one or more automobiles. In our view it does not, because a request for general information about products and prices offered does not involve a business transaction initiated by the consumer.

More generally, you ask "when is the beginning of a business transaction" initiated by the consumer? In responding to this question, it is important to note that Section 604(a)(3)(F) limits this "business need" permissible purpose to transactions (i) that are "initiated" by the consumer and (ii) where the seller has a "legitimate business need" for the information. The staff's view is that an automobile dealer may obtain a report only in those circumstances in which the consumer clearly understands that he or she is initiating the purchase or lease of a vehicle and the seller has a legitimate business need for the consumer report information in order to complete the transaction.

For example, a consumer who asks a dealer questions about prices and financing is not necessarily indicating an intent to purchase or lease a vehicle from that particular dealer. Nor does the dealer have a "legitimate" business need for a consumer report in this situation. The consumer may simply be comparison shopping. In such a situation, the dealer must obtain written permission from the consumer before obtaining a consumer report. If the dealer would like to see a consumer's credit report before answering general questions about the availability of financing, this must be explained to the consumer and written permission must be obtained. In the same way, a request to "test drive" a vehicle does not indicate an intent to initiate the purchase or lease of the vehicle. Accordingly, if a consumer asks to test drive a vehicle, the dealer must obtain written permission from the consumer before obtaining a report.

Only in those circumstances where it is clear both to the consumer and to the dealer that the consumer is actually initiating the purchase or lease of a specific vehicle and, in addition, the dealer has a legitimate business need for consumer report information may the dealer obtain a report without written permission. In this regard, we note that obtaining information for negotiation purposes does not constitute a "legitimate" business need. The dealer must have a specific need for the information directly related to the completion of the transaction. For example, a dealer may obtain a report, if one is necessary, in order to arrange financing requested by the consumer.(1) The dealer may also obtain a report to check a consumer's creditworthiness when the consumer presents a personal check to pay for the vehicle. By contrast, a permissible purpose would not arise if a consumer intends to pay by cash.

2. Section 604(b)(2)(A) requires consumer report users, before procuring a report for employment purposes, to make a written disclosure to the consumer "in a document that consists solely of the disclosure" that a consumer report may be obtained for employment purposes. You ask whether a party that has secured an employee's authorization for the report in an employment application must also make the disclosure in a separate document. The answer is yes, because Section 604(b)(2)(A) specifically states that the document containing the required disclosure may not include other items.

You also ask what information may appear on the document and if "the FTC is suggesting that the document be of a certain size." It is our view that Congress intended that the disclosure not be encumbered with extraneous information. However, some additional information, such as a brief description of the nature of the consumer reports covered by the disclosure, may be included if the information does not confuse the consumer or detract from the mandated disclosure. We suggest no size requirement for the disclosure; a document that meets the "clear and conspicuous" standard set by the FCRA will be acceptable.

3. Finally, you ask two questions relating to Section 604(b)(3), which requires an employer "before taking any adverse action" based on a consumer report, to provide the consumer with a copy of the report and the summary of consumer FCRA rights prescribed by the Commission. First, you ask if a CRA is responsible for sending the required summary to employers. The answer is yes, because Section 604(b)(1)(B) imposes this duty on CRAs that provide reports for employment purposes. Second, you ask if there is any specific amount of time that must elapse from the time the required items are provided to the consumer and the employer's adverse employment action. The law is silent as to how long the employer must wait after making the Section 604(b)(3) pre-adverse action disclosure before actually taking adverse action; it states only that the specified items be provided before the adverse action is taken. Employers may wish to consult with their counsel in order to develop procedures that are appropriate, keeping in mind the clear purpose of the provision to allow consumers to discuss the report with employers before adverse action is taken.

The opinions set forth in this informal staff letter are not binding on the Commission.

Yours truly,

David Medine

1. The dealer's "permissible purpose" here is provided by Section 604(a)(3)(A), which permits the use of consumer reports in connection with a credit transaction involving the consumer.

thecomplianceguide.com is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the general nature of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations and circumstances.

New Federal Bailout Program Offers Hope

January 23, 2009 | No Comments | share on facebook | retweet | share on LinkedIn

by Randy Henrick

I don't need to tell you that credit markets critical to auto dealers have been seemingly stalled for months despite the distribution of over $350 billion to banks under the federal Troubled Assets Relief Program ("TARP").  That may be about to change.

In November, the Federal Reserve Board announced a new program, the Term Asset-Backed Securities Loan Facility ("TALF").  TALF is intended to revive the secondary market for consumer auto lending and inventory financing, among other consumer and small business credit.  The inclusion of securitized inventory finance receivables in TALF was due largely to effective lobbying work in Washington by NADA.

As you probably know, banks don't like to make loans to keep on their books because all loans have to be reserved against by capital maintained by the bank.  This ties up assets and if the loans go delinquent, the capital requirements increase.  That is why banks make loans and then immediately "securitize" them which simply means selling the loans for cash to a special-purpose company that issues securities backed by the anticipated consumer payments on the underlying bank loans.  The bank gets cash for the loans and gets the loans off its books thereby freeing up more cash and capital for the bank to make more loans.  The securities typically pay investors a higher yield than Treasuries, and the bank makes additional income from servicing the securitized loans.  These securities are called asset-backed securities (ABSs).  When times are good, new loans made and securitized as ABSs backed by consumer debt (such as auto finance credit) are continually cranked out and sold to investors.  This is how most consumer credit becomes available for mortgages, auto purchases and leases, student loans, credit cards, and other consumer lending.  Consumer spending still drives the U.S. economy.

But last October, when consumer loan defaults (especially on mortgages) reached rates of delinquency not seen in a generation or more, the market for ABSs dried up almost completely.  That's because when the underlying consumer loans go above a certain delinquency rate, ABSs can unwind in a manner analogous to a bankruptcy (potentially leaving the investors with only pennies on the dollar) unless there are credit performance guarantees provided by the bank or an insurer.  AIG, the first federal bailout beneficiary, issued most of the credit performance guarantee insurance for consumer loan-backed ABSs in the United States.  That's why they got bailed out.

Even so, the market value of consumer loan-backed ABSs dropped enormously and many ABSs went unsold.  To make the problem worse, banks have to "mark to market" the value of all of their assets for regulatory accounting purposes.  Market value, not book value, is what determines a bank's financial condition and capital requirements.  So banks that held ABSs in their investment portfolios suddenly faced capital shortfalls and literally had no money to lend to auto dealers or their customers.  Additionally, the glut of unsold ABSs further reduced the market value of these investments as a whole.  With their asset values shrinking and ABSs no longer a viable option, bank credit dried up and banks looked to TARP money just to meet minimum capital requirements.  That's why most of the initial TARP money never made its way to Main Street.

That's a bit of an oversimplification but you get the idea.  What the Fed will do starting in February 2009 will be to use TALF to encourage large entities like hedge funds to invest in ABSs by having the Federal Reserve Bank of New York lend investors the money to buy newly-issued ABSs backed by new consumer credit.  The 3-year, fixed or floating-rate interest TALF loans will be non-recourse to the borrowers, meaning that the Fed can only look to the underlying ABSs for loan repayment if the investors default.  Also the ABSs put up to secure the TARP loans will be valued at par, not "marked to market."  So the Fed is taking the downside risk of rising consumer delinquencies (or rising interest rates) lowering the market value of the ABSs that secure the TALF loans.  The first $20 billion of ABS assets purchased and managed by the Fed for the TALF loans will be covered by the Treasury Department using TARP funds.  This should make large investors (the minimum TALF loan will be $10 million) more comfortable in buying ABSs and the Fed hopes that will jump start consumer lending and dealer inventory financing by banks.

Perhaps the best news is that TALF loans are limited to newly-issued ABSs generated from new consumer auto finance (purchases and leases), credit cards, student loans, and Small Business Administration (SBA)-guaranteed credit, although many experts believe the SBA piece will be very small.  NADA's ability to get the Fed to expand TALF-eligible ABSs to those generated from inventory financing as well as consumer auto credit should also be a real boon to auto dealers who are having trouble obtaining credit to buy inventory.  At least in theory, the Fed is taking a lot of the risk out of the equation for banks and investors to reinvigorate auto finance.  Dealers will be the prime beneficiaries of all this.  The only catch is that the ABSs must have the highest investment-grade rating category (e.g., AAA) from two or more major nationally-recognized credit rating agencies.  But ABSs typically mix different categories of credit quality (subprime, prime, super-prime) so TALF will stimulate lending not only to just the most creditworthy borrowers.

There is an excellent chance that TALF will succeed.  In November, the Fed announced a similar program to buy $600 billion of mortgage-backed ABSs and other debt issued by government-sponsored entities like FANNIE and FREDDIE.  That program had an immediate effect in driving down mortgage rates and opening up mortgage credit to new buyers as investors anticipated new demand for mortgage-backed ABSs.  The same could happen under TALF for auto credit-backed ABSs.  It should spur significant lending and securitizations as there is a lot of investment money sitting on the sidelines and TALF may well be a tough deal for hedge funds and other big players to pass up.

So maybe we are on the verge of turning the corner.  Maybe bailout relief is finally coming to Main Street, at least to auto dealers on Main Street.  Coming indirectly, but coming nevertheless.  The Obama Administration's promise to make banks that receive TARP funds more accountable for consumer lending is another positive development.  Remember that it is always darkest just before the dawn.   

Randy Henrick is Associate General Counsel and lead Compliance Counsel for DealerTrack, Inc.  Compliance Corner is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

thecomplianceguide.com is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the general nature of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations and circumstances.

Dealer Group Sued by Attorney General

January 29, 2009 | No Comments | share on facebook | retweet | share on LinkedIn

by The Web Staff of News 10 Now

WATERTOWN, N.Y. -- A Watertown based car dealership chain says it will fully cooperate with the New York State Attorney General's Office after the A.G. filed a lawsuit against it earlier this week... 

CLICK HERE FOR THE FULL STORY.

thecomplianceguide.com is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the general nature of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations and circumstances.