10 Best Practices for Auto Dealers Pulling Credit

1. Always have a "permissible purpose" to pull a consumer's credit report.


A signed authorization from the consumer (generally on a credit app.) is strongly preferred but not required when the customer has applied for credit to purchase a vehicle, except in Vermont. Most credit applications, which are usually signed by the consumer, contain language where the consumer agrees that  a dealership can access their credit report. Financing sources usually obligate dealers to either post or provide to credit applicants a list of the names and addresses of financing sources with which the dealer does business and to which the dealer may send their credit application. This is required by the FCRA.


2. Send adverse action notices when required.


Remember the three situations in which you must send an adverse action notice: a) You take a consumer's credit application but do not send it to any financing source; b) You unwind or re-contract a spot deal; and c) You can't get the customer financed either because no financing source approves the customer's credit application on terms acceptable to your dealership or the customer does not accept or use your final credit offer after negotiations are completed. When unwinding or re-contracting a spot deal, a good practice is to hand the customer the adverse action notice along with the new contract when they return to the dealership or when they return the vehicle in an unwound spot transaction. Note that on July 21, 2011, requirements for adverse action notices will change to mandate inclusion of a consumer's credit score and credit score distributions in a manner similar to the Risk-based Pricing Rule credit score disclosure notice.


3. Comply with the Risk-based Pricing Rule by giving the credit score disclosure notice to all credit applicants.


Obtain the consumer's credit score and the distribution of credit scores for the scoring model used from a credit bureau or a third-party source such as DealerTrack. Use the FTC's model form notice. Give the notice to the consumer as soon as possible after getting the information necessary to complete the credit score disclosure notice form. Keep a copy in the deal jacket. Giving the same form of notice to each credit applicant will minimize errors from needing to decide who should and who should not get a risk-based pricing notice under different standards set forth in the Rule. Give the same notice form to every credit applicant unless you give them exactly the credit terms they applied for (which are not to be confused with the credit terms you offer them after getting a decision on their credit application).


4. Accurately fill in all spaces on the contract and give the customer time to read the contract before they sign it.


Contract terms must be represented accurately. If the customer wants to have someone help them understand the contract, let that person read the contract as well. Do not pressure a consumer to sign a contract without reading it first. Do not misrepresent the terms of a contract. Do not roll negative equity into the sales price of the vehicle. Do not engage in payment packing by including additional items in the contract price. Do not backdate contracts, especially on recontracted spot deliveries that you unwind.


5. Do not charge credit customers higher prices than cash customers.


Be prepared to show that vehicle prices are individually negotiated in all cases, there is no set price in advance and there is no negative purchase price differential for credit as opposed to cash customers. Use a menu- selling process for aftermarket items to show you consistently offer the same products to all consumers at the same prices. For menu selling, employ the 300% rule - offer 100% of your products to 100% of your customers 100% of the time. Comply with California, Minnesota or other applicable state law requirements for disclosures of aftermarket products.


6. Know your state laws on permissible fees, especially


Don't charge excessive doc fees or any fees in excess of your state's specific limits. Plaintiffs' lawyers have brought UDAP cases under state law claiming that doe fees are excessive charges and hidden profits that dealers charge which are unrelated to their actual costs.


7. For spot deliveries, use a spot agreement that complies with your state's law.


If spot deliveries are permitted in your state, always use a spot agreement containing terms permitted or required by your state's law or approved in a case decided by a state appellate court. Try to include language that gives both you and the buyer the right to unwind or re-contract if you cannot obtain financial approval "on terms acceptable to the dealer." Your attorney should review and approve your form spot agreement for compliance with your state's laws.


8. Do not sell the customer's trade-in vehicle when doing a spot delivery until you have finalized financing of the customer's new vehicle purchase or lease.


Selling a trade-in vehicle before you have a final deal financed can subject you to a conversion (theft) claim or similar liability. Reported cases in which the dealer sells the consumer's trade-in almost always are a critical factor in a UDAP or similar finding against the dealer.


9. Document the customer's consent to re-contract an unwound spot deal.


When you re-contract a spot deal, get the customer to sign a form acknowledging their right to unwind the deal but indicating that re- contracting is their voluntary choice. Show on the form the different terms from the initial contract that you could not get financed. Do not backdate the new contract the customer is signing. Date the new contract when both parties sign.


10. Be able to show customers how they can quickly thaw their frozen credit files.


For customers who have placed security freezes on their credit files, have a sheet of paper available containing the phone numbers of all three national credit bureaus (Equifax, Experian and TransUnion) for the customer to call to temporarily "thaw" their credit files so that you can pull a credit report on the customer. This will require the customer to have available the PIN issued to them by the credit bureau when they first froze their credit file. The credit bureau is not obligated to thaw the credit file without the PIN. If the customer does not have the PIN, perhaps they can call someone at their home to get it. If the customer has their PIN, they can "thaw" their credit file and make their credit report and credit score available to you in a matter of minutes by simply calling the phone number for each credit bureau. It is not advisable for you to take the customer's PINs or offer to make the calls for the customer although you can give the customer access to a private phone in the dealership if necessary. If you spot deliver or sell a vehicle to a customer with a frozen credit file, proceed with extreme caution. Consider obtaining additional information, such as a pay stub, bank statement or other evidence of the customer's creditworthiness, and be especially diligent when verifying the customer's identity.




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DBA American Credit Systems, 2020. The Punt Group, LLC

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