New Regulations for 2011

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As 2010 closes and a New Year dawns, attention inevitably focuses on changes that will have to be made for the New Year that will impact business.  Congress routinely makes laws and then sets implementation dates for the first day of the New Year.  So it is around this time that businesses begin the adaptation process for any new legal or regulatory changes that are looming.

For 2011, the car business (and other financial institutions) will need to comply with two new significant regulatory changes that will affect how information is distributed to consumers that finance vehicles, repairs or parts.  If you have purchased a vehicle lately, you realize that there is a mountain of accompanying paperwork associated with the purchase. Be assured that in most cases, it is not the dealer requiring all of the paperwork. Dealers are mandated by a maze of federal and state laws and other federal and state regulations.  When the ball drops on 2011, you can expect just a little more paperwork courtesy of two new federal regulations requiring compliance from car dealers who offer credit sales to customers.

Most consumers’ car purchases are made with credit.  Before a bank will lend money, they will determine creditworthiness based on the customer’s credit score.  The credit score, or FICO, is a three-digit number designed to gauge creditworthiness.  Lenders use this number to determine if an individual is worthy of receiving credit and, if so, at what interest rate.  The score ranges from 300 to 850 and is calculated using a complicated formula consisting of private information including income, credit history, debt and other factors.  The credit report contains the consumer’s name, address, social security number, employment information and other personal and private information.  Usually, a consumer with a lower credit score and higher risk rating will get a higher interest rate and other less favorable credit terms.  The score is basically a rating of default risk attributed to a customer.  A high score means low risk of default and a low score means high risk of default.

One new rule, “The Risk Based Pricing Rule”, requires any company that uses a credit score in connection with accepting or denying credit to deliver notice to a consumer whose credit application has been approved (but generally on less favorable terms) to the existence of negative information in the credit report.  Basically, the report will alert consumers to negative information in their credit report that may have affected the terms of the credit. Those terms could be affected by increasing the interest rate charged, limiting the length of the loan, or requiring additional money down before accepting the credit application.  The purpose of the regulation is to improve the accuracy of credit reports by giving consumers the information contained in the report and thus an opportunity to correct errors.  More detailed information can be obtained at www.ftc.gov.

The second rule that will be implemented is the “Privacy Rule”.  While this rule has been in place for a number of years, the notice forms have now been standardized to allow consumers an easier way to determine how companies use their personal information.    It has taken the Federal Trade Commission nine years to promulgate rules for this action since implementing it in 2001.  Basically, the rule requires lenders to alert their consumers how personal information such as social security numbers, addresses and other non-public information is shared with outside companies and related organizations.  The new notice is easier to read and is formatted in such a way that consumers can easily determine how their information is treated.  Some sections allow consumers to “opt-out” of any sharing and the new report will alert the consumer to that option.  More information on this rule can also be found at www.ftc.gov/privacy.

Both rules favor the consumer and make the financial process more transparent.  Consumers will now be armed with more information about their credit score and, in turn, be able to correct inaccuracies.  Additionally, consumers will be able to make more informed decisions about the control of their personal information after an initial transaction.   While both rules are consumer friendly, they will make the financial process just a little longer through no fault of your dealer.