The bad news for auto dealers is that they have to comply with the federal Risk-Based Pricing Rule -- a complicated law designed to help consumers with below-average credit scores shop for the best available credit terms. The complex rule is part of the Fair and Accurate Credit Transactions Act of 2003 and it takes effect Jan. 1.

The good news is that the Federal Reserve and the Federal Trade Commission have authorized a shortcut for compliance, and technology vendors are making compliance almost automatic. Some vendors aren't charging for the service.

The shortcut is a simple disclosure notice that dealers have to give all finance customers after they apply for credit but before they agree to financing terms. The federal government provided the industry with a model notice to take the guesswork out of compliance.

The notice discloses the customer's credit score; how the score affects credit terms; how the customer's score ranks against those of other consumers; what to do if a credit report is inaccurate; and how to obtain a copy of the customer's credit report. An alternative notice discloses whether the customer has no credit score. 

“This is an incredibly complex rule,” says Michael Charapp, a McLean, Va., lawyer who represents auto dealers. “I have been advising dealers to not even try to understand the rule. Simply make use of the alternate compliance method.”

Industry computer vendors -- including dealer management system providers -- are building the notice into their software. At least three vendors involved in credit processing -- DealerTrack, RouteOne and Credco Services -- are automatically providing a completed disclosure notice at no charge. Credco provides a brief Q&A to explain the disclosure requirement to customers.

The majority of franchised dealers use the DealerTrack and RouteOne automated credit application systems to match lenders with finance customers. Many also use Credco Services, which provides electronic access to credit bureaus. 

“Delivering exception notices to consumer credit applicants in a timely manner satisfies the compliance obligations for dealers,” says Paul Metrey, chief regulatory lawyer for the National Automobile Dealers Association. “However, dealers should also develop reasonable policies and procedures.”

NADA has prepared a compliance guide, which is free to its members, and is conducting webinars. Vendors such as DealerTrack and Route One also have provided webinars to educate dealers. 

“It's not a big deal — until you don't follow through with it,” says David Westcott, an NADA director and president of Westcott Buick-GMC-Suzuki in Burlington, N.C. “Then you have regulatory agencies discussing it with you.”

Lawyer Charapp offers some tips for compliance:

• Appoint a coordinator who will be responsible for compliance. Usually this will be the same employee who coordinates compliance for the federal Safeguards Rule and Red Flags requirements protecting the dealership and its customers against identity thieves. 

• Make arrangements with a vendor to supply the notice or use the vendors that automatically embed the notice requirement in their software.

• Train the staff to deliver the credit score notice to every consumer who applies for credit. Customers who don't have credit scores receive a similar notice. “If there are joint applicants, each one should get a notice,” he says.

• Have the customer sign the notice and keep a copy of it in the deal jacket or application file. The rule doesn't require customers to sign off on the notice, but signed copies protect the dealership if customers later claim they didn't receive it. 

• Spot-check deals or application files to make sure employees are delivering the notices to customers. 

“There may be some initial reluctance to comply by personnel since this is just another form that must be presented to and possibly explained to a customer,” Charapp says. “So spot-checking will be important.”

Donna Harris 
Automotive News