Judge: Auto dealers must disclose loan rate reasoning

Michael P. Tremoglie May 29, 2012, 7:22am


WASHINGTON (Legal Newsline) - A federal judge ruled Thursday that automobile dealers who use third-party financing transactions must tell borrowers who receive higher interest rates the reason for the adverse rates.

Judge Ellen Huvelle of the U.S. District Court for the District of Columbia upheld the Federal Trade Commission's determination that auto dealers must comply with this provision even when they engage in "three-party" financing transactions, in which the dealer agrees to extend financing to a consumer and then immediately assigns the loan to a third party, such as a bank or finance company.

When lenders establish an unfavorable interest rate by relying on a credit report, the Fair Credit Reporting Act requires them to notify the consumer and provide instructions on how the consumers can obtain a copy of their credit history report and, if necessary, dispute and correct any false or incomplete data. One of the purposes of the statute is to help prevent identity theft.

But the National Automobile Dealers Association argued that it should be exempt from providing this notice. It argued that when only the third party, and not the car dealer, actually obtains the credit report, then the car dealers should be exempt from providing any disclosures to the consumers.

The FTC rejected this argument. It maintained that even though car dealers do not actually obtain the credit report, they use it. Therefore they are obligated to provide consumers with the notice.

The NADA sued the FTC, challenging this interpretation. The court agreed with the FTC's position in its ruling.

"This ruling will make it easier for consumers to learn about unfavorable information in their credit reports. Not only will this give them an opportunity to correct any inaccuracies, but it also provides a key tool needed to combat identity theft or fraud," said Stuart Delery, Acting Assistant Attorney General for the Civil Division.

"The auto dealer is in the best position to provide this information because the dealer interacts directly with the consumer and establishes the credit terms in the agreement that it enters with the consumer."

According to the Department of Justice, which defended the FTC, using the NADA interpretation, consumers would never receive this disclosure. The court also believed that all entities providing consumer credit would enter similar arrangements exempting themselves from disclosing adverse information in consumer reports.

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