A federal judge in Washington has ruled that auto dealers who engage in so-called three-party financing transactions must disclose car loan information to consumers if they are offered less favorable terms, such as a higher interest rate, than the most favorable terms available to the majority of consumers.
In a Federal Trade Commission rulemaking proceeding, the National Automobile Dealers Association (NADA) argued that auto dealers using these transactions should be exempt from providing this notice. NADA claimed that, when only this third party, and not the car dealer, actually obtains the credit report, then the car dealer should be exempt from providing any disclosures to the consumers.
The FTC rejected this argument and concluded that the auto dealers actually use the credit report even if they do not physically obtain it, and so must provide the notice to consumers. NADA sued the FTC, challenging this interpretation.
The court agreed with the FTC’s position in its ruling. Federal Judge Ellen Huvelle upheld the FTC’s ruling that auto dealers must comply with this provision even when they engage in “three-party” financing transactions, in which the dealer agrees to extend financing to a consumer and then immediately assigns the loan to a third party, such as a bank or finance company.
“This ruling will make it easier for consumers to learn about unfavorable information in their credit reports. Not only will this give them an opportunity to correct any inaccuracies, but it also provides a key tool needed to combat identity theft or fraud,” said Stuart Delery, Acting Assistant Attorney General for the Civil Division of the Justice Department.
Under NADA’s reasoning, the car buyer would never receive this disclosure from the dealer or from the third-party finance company. The precedent is significant because all entities that extend credit to consumers could enter similar third party arrangements and exempt themselves from giving consumers any disclosures relating to adverse information in consumer credit reports.