The Consumer Financial Protection Bureau has made transparency one of its primary focuses since its inception, and the FTC has followed suit. Consumer education and financial literacy are also extremely important to both agencies. Providing simple and accurate disclosures that a consumer can understand meets the needs of both consumers and dealers, since a better-informed consumer makes for a more satisfied customer.
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. So why should a dealer care about disclosures? If the required disclosure is inaccurate or not given, the dealer can end up in a world of hurt, and by that I mean out-of-pocket financial pain. Reason number two: the FTC and CFPB care about disclosures, so dealers should too. So, pay attention.
Assuming customers read them, disclosures provide critical information about the installment sale transaction through which the consumer will finance the vehicle. This article is Lesson Two in a series of articles on disclosures provided in a motor vehicle installment sale transaction. In it, I’ll review disclosures required by federal law at the time a consumer applies for credit.
The Equal Credit Opportunity Act and its implementing Regulation B, along with the Fair Credit Reporting Act, generally impact the content and, in particular, the collection and consideration of information in a credit transaction.
The Equal Credit Opportunity Act and Regulation B prohibit creditor practices which discriminate based on race, color, religion, national origin, sex, marital status or age (provided the applicant has the capacity to contract); the fact that all or part of the applicant’s income derives from a public assistance program; or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. Those prohibitions form the categories of information that are restricted for an oral or written request for an extension of credit.
An application can ask for the income of the applicant, but it cannot ask about the sources of income unless the creditor discloses to the applicant that the income need not be revealed if the applicant does not want it considered when determining their creditworthiness. An example of this disclosure might read: Alimony, child support or separate maintenance income need not be revealed if you do not wish to have it considered as a basis for repaying this obligation. The placement of this disclosure is important, as well. It should appear before the question dealing with income.
An application may not ask about the sex of an applicant. An applicant may be requested to designate a title on an application form (such as Ms., Miss, Mr., or Mrs.) if the application also discloses that the designation of a title is optional. A creditor may request an applicant for secured credit, like auto finance, to indicate marital status, but only the terms “married,” “unmarried” and “separated” may be used.
A credit application should provide an opportunity to disclose more than just salary and wages. Providing such an opportunity avoids discounting protected income such as public assistance income, retirement, alimony or child support income.
A creditor may not assume that more than one person’s signature on a credit application indicates an intent to submit a joint application for credit. An application should contain a provision signed or initialed by joint applicants stating that the applicants intend to apply for joint credit, when that is the case.
As any good lawyer knows, there are exceptions to every rule and there are some circumstances where a creditor may ask for information that’s typically prohibited; it is wise to have your credit application reviewed by a competent attorney for compliance with those laws.
Another law also impacts the content of a credit application. The Fair Credit Reporting Act governs transactions involving the use of a consumer report, such as a credit score or a report from a credit bureau. FCRA prohibits consumer reporting agencies from furnishing consumer credit reports without a permissible purpose, as defined in the Act. Among the permissible purposes is when a creditor intends to use the information in connection with an application for a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to that consumer. Even though dealers have a permissible purpose to obtain a consumer report when a customer applies for credit with them, many creditors include an express authorization whereby the consumer grants the creditor the authority to investigate that consumer’s credit. That is certainly a “best practice” and is also a state law requirement in a few states.
The credit application should also list the name and address of any sales finance company or financial institution to which the dealer may shop the contract. Dealers may identify these potential assignees in other ways, such as on a separate list given to the consumer or even by a sign posted prominently in the dealership, but many dealers find listing them on the credit application to be convenient. Including the name and address of the potential assignee keeps the sales finance company or financial institution from being treated as a consumer reporting agency when it communicates the credit decision to the dealer.
A dealer may also want to consider adding a disclosure expressly authorizing the creditor to contact the applicant at any telephone number provided to the creditor, even a cell phone number, and using any communication method, including an automated dial announcing device or by text message.
There is a lot of law that goes into a credit application, and I have by no means hit every limitation, prohibition or requirement for a credit application. As mentioned above, state laws also impact credit application disclosures. There are any number of ways to violate ECOA and Reg. B, FCRA or a state law in connection with a credit application. So be wise, and be in touch with a competent lawyer who can review your credit application for compliance with applicable laws.