Car Dealers Must Disclose Reliance on Negative Credit History to Raise Car Loan Interest Rate

On May 31, 2012, the U.S. District Court for the District of Columbia held that the Fair Credit Reporting Act requires a car dealer to disclose to a car buyer that negative credit history resulted in a higher interest rate on the buyer's car loan - even if the dealer was not the one that reviewed the credit history because only a bank or finance company did so.  The case is National Automobile Dealers Association v. Federal Trade Commission, Civ. A. No. 11-1171 (ESH). 

The National Automobile Dealers Association (NADA) filed the case to challenge the Federal Trade Commission's rule that required such disclosures.  The Fair Credit Reporting Act has long required creditors to notify consumers of "adverse actions" taken based on information in a credit report, such as when credit is denied.  In 2003, Congress amended the FCRA to additionally require users of credit reports to provide a "risk based pricing notice" when negative credit history results in a higher interest rate.  Reasoning that because the dealer is who the buyer directly interacts, the FTC, charged with interpreting the FRCA, held that a car dealer is a "user" of credit reports that must provide this notice.  

NADA sued seeking to have this rule overturned, arguing that a car dealer is not actually a "user" of the credit report if it is a bank or finance company that actually determines the higher interest rate.  To understand the context of NADA's position, one must consider how the typical car financing works.  Dealers selling cars on credit are lenders, and so subject to laws such as the Truth in Lending Act that impose disclosure and other obligations on creditors.  Dealers thus prepare contracts setting forth the loan interest rate, and execute such contracts as lenders as part of the car sale.  Dealers generally then assign the car loan to a bank or finance company immediately after selling the car.  NADA argued that when the bank or finance company reviews a credit report and communicates to the dealer, which in turn inserts the higher interest rate into the contract, the dealer is not a "user" of the credit report.  The FTC rejected that position, and the federal court upheld the FTC's interpretation as reasonable.

NADA's position appears somewhat bold.  Car dealers have long had a hard time accepting the fact that when they sell cars on credit, they are creditors.  Thus one still occasionally sees outright TILA violations where the dealer doesn't even disclose a finance charge or interest rate.  In the "risk based pricing notice" scenario, even if the dealer didn't look directly at the buyer's credit report, it executed a contract containing the interest rate and so relied on the report one way or the other.  The scenario in which NADA's position actually would make sense would be one where the dealer inserts an interest rate and only later contacts a bank or finance company which then pulls the report.  In that situation, one often finds that the dealer can't unload the paper because the bank or finance company demands a higher rate.  The law's response to that situation is to say, too bad so sad.  The dealer made a bad loan and is stuck with it.  But practically, this is where one sees the classic "auto fraud" fact patterns, the "yo-yo sale" and "spot sale."  The dealer prepares new contracts with the higher rate and talks the buyer into signing them, threatening to take the car back if not.  Don't do it!  This is fraud, deception, and an outright TILA violation - an expensive one for the dealer because damages under TILA are double the total finance charge over the course of the loan, which could be tens of thousands of dollars.  


My firm handles lawsuits addressing car dealer or lender misconduct.  If you have been the victim of any fraud or abuse  by a car dealer or lender, contact us to discuss your options.