The Practical Dealer's Guide to the New Risk-Based Pricing Rule | Compli.com

The Practical Dealer's Guide to the New Risk-Based Pricing Rule

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Article: The Practical Dealer's Guide to the New Risk-Based Pricing Rule

Article Date: Monday, March 15, 2010

Author: Tom Hudson and Michael Benoit

Article Source: Spot Delivery-Feb 2010

The Practical Dealer.doc

The Practical Dealer’s Guide to the New Risk-Based Pricing Rule

By Thomas B. Hudson and Michael A. Benoit*

In late December, the Federal Reserve Board and the Federal Trade Commission issued their joint Risk-Based Pricing Rule. The notice issued by the agencies is a mere 202 pages long.
The Rule requires a dealer who varies the cost of credit based on information in a buyer’s credit report to give some buyers – essentially, those who paid more for financing than some others – a risk-based pricing (“RBP”) notice. You, or your lawyer, will need to read the rule in detail. It is aimed squarely at dealers and is not something your finance companies can do for you.
Here’s the shorthand version of the Rule, which becomes effective on January 1, 2011.
The Rule offers three ways to determine which buyers will be given the required notice. The dealer can do a case-by-case analysis of its deals, basically subjectively determining whether each individual customer is entitled to a RBP notice. Alternatively, the dealer can elect to use something called the “credit score proxy method” or the “tiered pricing method”. Even the easiest of the three methods is difficult to understand, and because the agencies aren’t well versed in the mechanics of indirect financing, dealers will be hard pressed to comply effectively with any of the methods.
The Rule provides a handy-dandy exception, though. If the dealer gives every customer who applies for credit (even if the customer doesn’t ultimately buy the car or accept financing) a copy of the buyer’s credit score and a notice in a form provided by the agencies, the dealer is not required to provide the RBP notice.
So you might want to simply forget about giving the RBP notice altogether and, instead, rely on the exception. There are some advantages to this approach. First, you (or your lawyer) can skip most of the 202 pages and concentrate on the parts of the release dealing with the exception. Second, unlike the “case-by-case,” “tiered pricing,” and “credit score proxy” methods, dealers can actually comply with the requirements that apply to the exception. And finally (you should write this down), any time the feds give you a free space in the form of a safe harbor compliance method with agency-blessed forms, you should grab it and run.
Now this article isn’t entirely serious – we do have our tongue a bit in cheek – but we have provided the basics of the Rule. You and your lawyer should become familiar with the Rule and track behind us to see if you agree with our analysis. We think you likely will.
We also think that this is one of those instances in which vendors will be working up solutions that will help you comply with the new Rule. But don’t wait too long for the vendors – the burden of complying with the Rule falls squarely on dealers, and 2011 will be here before you can blink.
*Michael A. Benoit is a partner in the Washington, D.C., office of Hudson Cook, LLP. He is a frequent speaker and writer on a variety of consumer credit topics. He can be reached at 202.327.9705 or by email at mbenoit@hudco.com.