Tuesday, October 26, 2010

Risk Based Pricing Rule

As the Risk Based Pricing Rule goes into effect Jan 1st 2011, how many of you already have a negative view against it? More government regulation inflicted upon automobile dealers. More of our taxpayer dollars spent on a useless and confusing program

What is the Risk Based Pricing Rule and how is the automotive industry required to comply with it?

Here is a link to a good article written by Randy Hendrick (Dealer Track) for F&I Magazine: http://www.fi-magazine.com/Article/Story/2010/03/New-Credit-Rules-Decoded.aspx.

Randy points out that "the new notices are intended to complement adverse action notices, which dealers are already accustomed to issuing when they can’t attain financing for a customer. The difference with the risk-based pricing notices is that they must be handed to consumers before the transaction is consummated; that is, before the customer signs the retail installment sales contract (RISC)".

So it sounds like this is another item that will be required to be included with the customer's paperwork, and moved from one paperwork stack to the other, at the step directly before they sign the RISC.

Ok, so why exactly do we need to do this?

Below is a link to the full 202 page text of the rule: http://www.ftc.gov/os/2009/12/R411009riskbasedpricingfrn.pdf

Basically, the FTC and the Federal Reserve Board are trying to look after the public, specifically those who have less than perfect credit. They are requiring creditors (yes - dealerships are creditors) to give notice to consumers when their credit caused them to receive higher interest rates.

A dealership would need to calculate their average contract rate per financed customer, and provide this required disclosure to anyone who doesn't qualify for this average rate.

??? Talk about opening up a can of worms. How many times could doing this cost a deal? Or almost as bad - giving them a reason to walk out of the dealership under the premise of checking with their credit union.

Let's look further into this...

The finalized rules implement Section 311 of the Fair and Accurate Credit Transactions Act of 2003. The rule states that dealers can determine which customers should receive the notices by using the dealerships average credit score or their average credit tier.

The Dealer Exemption

There is also a dealer exception that doesn't require a notice to be given, but will require that the dealer spend extra money buying a product from the credit bureau they used in their decision. This product will show the credit score of the customer and where the score falls within the national average of scores.

NADA's response statement:

“Due to the difficulty in determining which subset of credit customers must receive risk-based pricing notices, NADA strongly urged the agencies to create an optional compliance mechanism that would allow dealers to provide all of their credit customers with a simple notice that satisfies the requirements of section 311,”

The statement reads:

“The agencies adopted this recommendation by permitting an exception notice to be issued in lieu of a risk-based pricing notice provided it contains the consumer's credit score, date the score was created, certain information to put the score in context, and additional boilerplate language concerning credit scores, credit reports, and how consumers may access their credit report".

Like the risk-based pricing notice, this notice must be handed to the customer before the transaction is consummated.

In conclusion:

The rebel in me wants to find some "generic fill in the blanks" form for the F&I Manager to hand-write the days date and the customers credit score copied from the top of the pulled credit report (that we already pay for). I will be looking into this after this post is published.

My amazement at the use of our tax dollars is never-ending - this program is confusing at best. There also seems to be no "teeth" anywhere in the text of the regulations, unless I missed it. What are the exact penalties for non-compliance?


Most dealers will probably go for the dealer exception - handing EVERY customer a Credit Score Disclosure Form. This will require the dealership to buy the form from either Equifax, Experian or Transunion, and spend resources to print it off just to comply with the rule.

Requiring compliance is going to basically create another profit for the three credit bureaus at the expense of the automotive dealer.

Ok, I need a break.

Next post: AFI's take on the new "Safe Harbor" Privacy notices: CLICK HERE

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Anonymous said...

Good post.

Tim said...

According to Dealer Track, a Risk Based Pricing form will be incorporated into their existing Compliance software.