Auto Finance Excellence – July 29, 2022
Dealerships continue to struggle with inventory shortages that frustrate sales staff and potential customers. In many cases, potential customers are ready, willing and able to finance a specific vehicle or type of vehicle if it becomes available within one month – or possibly within two, three or even four months. in the current environment. This raises questions about how dealers can respond when customers want to finance vehicles that may sit unavailable for months.
When can the dealer get a consumer report on a potential customer?
A dealer may only obtain consumer reporting information if it has a “permitted purpose” to do so under the federal Fair Credit Reporting Act (FCRA). This is true whether the dealer receives a credit application, a pre-approval or pre-qualification application, or no financing application. In this context, Reseller will only have an authorized purpose when: (1) it is acting in accordance with the “written instructions” of the prospective customer; or (2) it will use the information in connection with a credit transaction involving the extension of credit to the prospective customer. Generally, a potential customer will be required to sign written instructions authorizing the merchant to obtain consumer report information except when receiving the customer’s credit application. There are subtle but important differences between a credit application and a prequalification application.
What is the difference between an application and a pre-qualification request?
The Federal Equal Credit Opportunity Act (ECOA), as implemented by the Consumer Financial Protection Bureau CFPB Regulation B requires the creditor to inform applicants of the outcome of their credit applications and to keep records of these applications. A request generally means a request for extension of credit made in accordance with the procedures used by the lender for the type of credit requested. Not everyone who asks the dealership about credit or even asks to receive prequalified offers from the dealership has submitted a credit application.
Whether a customer’s prequalification request becomes a request depends on how the lender responds to the consumer, not what the consumer says or asks. For example, a creditor may treat a prequalification request simply as an inquiry if it assesses specific information about the consumer and then provides the consumer with a loan amount, rate, and other credit terms at which the consumer can qualify under various credit programs. However, if the lender evaluates the consumer’s information, decides not to approve the application, and communicates the decision to the consumer, then the lender has treated the consumer’s prequalification request as an application.
When must the dealer inform consumers of the follow-up given to their requests?
A lender’s obligation to provide the notice of action taken or notice of incompleteness arises only when the consumer has submitted an application that qualifies as an application or when the lender decides not to approve the application for prequalification of a consumer and communicates the decision to the consumer. Within 30 days of the creditor’s receipt of a completed application, the creditor must notify the applicant of the creditor’s approval, counter-offer, or adverse action with respect to the application. Within 30 days of taking adverse action on an incomplete application, the lender must notify the applicant of the action taken, unless the lender issues a notice of incompleteness specifying the information needed and the time period within which the consumer has to provide this information.
How can a dealer use prequalified offers to keep a potential customer interested when inventory is low?
Dealerships can ask potential customers if they would like to receive pre-qualified credit offers, even when the customer has not yet decided on a specific vehicle or when the vehicle the customer prefers is not available and cannot be identified specifically anytime soon. Of course, dealerships need to be careful how they receive and respond to customer requests for prequalified credit offers.
For example, consumer reports can become outdated and unreliable after a relatively short period of time, so any pre-qualified offer made by the dealer must indicate the expiration date of the original offer. The dealer’s prequalified offer must also disclose common conditions and reasons that may prevent customers from receiving credit in the future, even if their preferred vehicle becomes available and they submit a claim before the credit expires. prequalified offer.
In all cases, merchants must ask the customer to sign a document expressly authorizing them to obtain consumer report information for the purpose of making pre-qualified credit offers. If the dealer intends to obtain the consumer report information from the customer on more than one occasion after the expiry of the creditor’s initial offer, the authorization signed by the consumer must describe the scope and duration of the dealer’s authorization to obtain the consumer report. Requiring the customer to sign an authorization that allows the reseller to obtain an indefinite number of consumer reports, and without a time limit, will create business practice and FCRA risk for the reseller.
And, in cases where the dealership notifies a customer that they are not eligible for prequalified credit offers, the dealership must provide the customer with Notices of Adverse Action that make the disclosures required by the ECOA and FCRA. .
This article was first published in Auto Finance Excellence, a sister service to Auto Finance News. McGlinchey is pleased to be the Official Compliance Partner of Auto Finance Excellence, providing insight and thought leadership through webinars, podcasts and monthly columns.