Sneak Preview: Safe-Harbor Privacy Notice & Risk-Based Pricing Rule

The Safe-Harbor Privacy Notice and Risk-Based Pricing Rule will go into effect in only a few short months. Since NADA has not issued its official guides, any speculation on my part about what their stance might be would be counterproductive. However, you can still learn a lot today.

Safe-Harbor Privacy Notice – What We Know Now

In an effort to ensure uniformity in the privacy notices being issued to consumers, the Gramm-Leach-Bliley Act was amended to create an online standardized form builder to generate compliant privacy notices. If the forms are properly constructed and applied, they provide a legal safe harbor. The forms currently utilizing the 2001 model language will only provide safe-harbor treatment through the end of this year. Privacy notices issued after December 31, 2010, must contain the new form text with very limited modifications to qualify for safe-harbor protection.

As of July 2001, dealerships have issued privacy notices at the time of consummation. Thereafter, the lending institution to which the installment sale agreement is assigned must issue annual notices until the vehicle is paid off. This will remain unchanged.

But the content of the privacy notices has changed and there are tighter restrictions on how they’re used to qualify for the safe-harbor protection. Here, a "safe harbor" is a provision in the regulation that reduces a party’s potential liability on the condition that the party accurately generates privacy notices using the online tool and, by doing so, creates a presumption of compliance. In other words, if you do things properly, you may be afforded a measure of protection if your actions are challenged.

It's up to management to fully assess operational and marketing situations before selecting which privacy notice option best suits the dealership’s needs. Once completed within the established parameters, it can only be used as the form allows to be accorded safe-harbor protection.

As always, nonpublic personal information can be shared with potential lenders or other entities that need to evaluate potential in-store finance and lease customers’ financial worthiness. Under certain circumstances, it is possible to share customer information for marketing purposes between other dealerships under common ownership – as long as the proper notice is used and, if required, the proper opt-out provisions are addressed. Again, for the safe-harbor protection to apply, a hot prospect’s non-public personal information cannot be sent to a buddy at a sister dealership (or the aluminum siding company down the street) unless the notice issued explicitly allows it.

Risk-Based Pricing Rule – What We Know Now

Think about the Risk-Based Pricing Rule as the counterpart of the Adverse Action Notice. Both are the result of the federal government’s belief that consumers will make better credit decisions if they are aware of their personal scores as they compare to those of the general population. The Risk-Based Pricing Rule creates new notice requirements that significantly amend the FCRA. The Risk-Based Pricing Rule is effective January 1, 2011.

Dealers who, while acting in their capacity as creditors at the time of sale, use consumer credit reports to establish cost-of-credit risk-based pricing, must comply with the Risk-Based Pricing Rule. The rule excludes consumer lease transactions and business credit. Also, depending on the situation, customers with good credit may not need to be given the risk-based pricing notice if their credit score is in the upper 40 percent overall.

The notice must be issued to consumers in cases when “material terms (the APR) that are materially less favorable than the most favorable terms available to a substantiated proportion of consumers from or through that person.” Basically, you have to give the notice to consumers whose credit scores are in the bottom 60 percent of all consumers. In this case, a willing lender was found and the deal was consummated, but the buyer had a low enough credit score that the APR they were offered was less than the most favorable rate available.

There are two government-issued methods for identifying customers who should receive RBPNs, the Credit Score Proxy Method and the Tiered Pricing Method. But these determinations can be cumbersome and (because they’re only issued in select situations) difficult to monitor. As negotiated by NADA and explained in detail in their upcoming guide an exception notice can be issued in lieu of the risk-based pricing notice.

The exception notice is modeled after the California Car Buyers Bill of Rights Credit Score Disclosure form. The exception notice must be issued to all installment sale and consumer lease customers who are actively pursuing in-store funding options. Three worthy elements of the exception notice are:

• The range of possible credit scores must be displayed as a bar graph or fully explained in writing. Given the fluctuations in overall consumer credit score levels, the array should be updated as required.
• The exception notice must state the customer’s credit score. Dealers who don’t get credit scores in the normal course of business must secure the credit scores if they wish to use the exception notice. (Please note that the exception notice may require that both the buyer and co-buyer be apprised of their credit scores.)
• The exception notice must state which credit reporting agency provided the information.

The provisions of the exception notice will be addressed in greater detail when made available by NADA.

Three Levels of Responsibility & Accountability

How both new notices are configured will vary according to the unique needs of each dealership. Dealers are encouraged to consult the NADA guides and retain competent legal counsel to ensure they are issuing the proper documents.

F&I Practitioner

The F&I staff will be responsible for processing the notices, so it's essential that they understand the spirit and specific provisions of the new notices – when they are to be used, how they are explained to customers, how they are executed and how the process is documented.

F&I Support Provider

The most famous phrase of the Hippocratic Oath certainly applies to integrating the two new notices into the F&I process. "First, do no harm." Don't become the purveyor of bad information. Misinformation about the two notices abounds, so seek guidance from competent counsel and reliable sources.

In the course of conducting onsite training, don’t merely ask the F&I practitioner if he or she understands the provisions of the new notices. Look to the FTC at www.ftc.gov, Hudson Cook, AFIP, and NADA for more detailed information on both notices. Go the extra step by asking specific questions about various aspects of the notices. Be vigilant in future calls to ensure that the notices are being used consistently and properly.