Disclosures in Auto Finance - Lesson 1:
Disclosures are meant to do many things, but let’s assume for a moment that disclosures are meant to focus consumers on important terms of a credit transaction so that they may understand those terms and make better choices about their credit.
Assuming customers read them, disclosures provide critical information about the installment sale transactions consumers enter into with dealers. In the coming months, I will be writing a series of lessons reviewing disclosures required by federal law in car finance transactions from application to closing. Why should a dealer be concerned about disclosure? Because if the required disclosure is inaccurate or not given, the dealer can end up in a world of hurt in the form of out-of-pocket financial pain. So, pay attention.
Disclosure is an important component of the car finance transaction. This is especially true for advertisements, which entice consumers to enter your door instead of the door of the guy down the street.
Both federal and state laws regulate credit advertising. Although many advertising laws simply act to prohibit unfair or deceptive advertising, there are also many laws that require that specific disclosures be made in a credit advertisement or solicitation.
The Truth-in-Lending Act (TILA) and its implementing regulation, Regulation Z, apply to the advertisement of specific terms of consumer credit. Reg Z generally requires that all advertisements for consumer credit be accurate. Thus, if specific credit terms are provided in an advertisement, the terms must actually be available through the creditor. If the terms are subject to restrictions or qualifications (such as only being available for a limited time period or subject to the applicant’s creditworthiness), the advertisement must clearly state this fact.
In regulating advertising, TILA and Reg Z use the concept of “triggering terms.” An advertisement that uses particular terms triggers further disclosure requirements.
The triggering terms are:
• The amount or percentage of any down payment
• The number of payments or period of repayment
• The amount of any payment
• The amount of any finance charge
If a triggering term is used in an advertisement, a dealer must also indicate the amount or percentage of the down payment, the terms of repayment, and the annual percentage rate, using that term or “APR.” Disclosures must be made clearly and conspicuously, so that means no hiding TILA disclosures in the small print. Although rare in used car financing, and likely inapplicable, if the rate can be increased during the term of the obligation, other rules apply.
If the dealer offers a range of possible credit terms, the dealer may use examples of typical credit transactions offered at the dealership. Each of the examples used must contain all the applicable required terms.
Special rules apply to catalogs or multiple-page advertisements. If such an advertisement gives information in a table or schedule in sufficient detail to permit the reader to determine the required disclosures, it will be considered as a single advertisement. The table or schedule has to show all appropriate disclosures for a representative scale of amounts up to the level of the more commonly sold higher-priced cars offered.
For Internet advertising, essentially the same rules apply, but with some minor differences to accommodate the realities of the Internet. For example, if a dealer uses any of the triggering terms described above, the dealer would need to include a link from the triggering term to the additional information Reg Z requires to be disclosed with the triggering term.
An advertisement made through television or radio stating any of the triggering terms may comply with disclosure requirements either by stating clearly and conspicuously each of the additional disclosures or by stating clearly and conspicuously the APR only and listing a toll-free telephone number, along with a reference that the number may be used by consumers to obtain additional cost information.
Disclosures don’t work if they provide too much detail or leave out important information. Disclosures don’t work if they highlight information a consumer doesn’t need or if they don’t accurately explain the transaction or the consequences of consumer actions or inaction. Disclosures don’t work if the dealer doesn’t provide them. So, before you sign off on your next, best advertising endeavor, consider whether you’re advertising credit, whether you’re using TILA triggering terms, and whether your advertisement complies with Reg Z disclosure requirements. A customer can’t use a disclosure if it isn’t provided.