The National Automobile Dealers Association has pulled the plug on its appeal of the Federal Trade Commission’s controversial interpretation of the Risk-Based Pricing Rule that applies to dealerships that don’t receive or review credit reports in three-party financing transactions.
The U.S. Circuit Court of Appeals in Washington, D.C., granted the NADA’s request to voluntarily dismiss the appeal on March 7.
NADA’s court filings gave no reason for withdrawing its challenge. However, in a brief statement, the dealer group said: “As it became evident that the court was not inclined to grant the relief NADA was seeking, NADA filed a voluntary unopposed motion to dismiss its appeal and its motion was granted.”
The FTC has no comment, spokesman Peter Kaplan says.
NADA’s action lets stand the FTC’s interpretation of the rule, and that could pose problems for dealerships, some legal experts warn.
“The FTC’s and district court’s interpretations of the regulations significantly impact dealers by forcing them to pull and retain credit reports when such a report might not otherwise be necessary,” says dealership lawyer Rob Cohen of Auto Advisory Services Inc. in Tustin, Calif. “Both of these requirements result in increased costs to dealers and increased exposure to consumers.”
He added: “Why the FTC or a judge would support any interpretation that actually requires dealers to pull sensitive credit reports of consumers is beyond me.”
Tallahassee, Fla., lawyers Dan Myers and Loula Fuller see several significant adverse effects for dealers, including the danger of chasing away customers by telling them they’re not getting the lowest interest rate.
“You run the risk of having the customer get up and leave. That’s a horrible negative,” Myers says. And Fuller says customers who learn they’re not getting the best loan rate will also wonder: “Am I getting the best price on the car?”
The rule also disadvantages smaller dealerships that lack the clout of high-volume stores and dealership groups to bundle loans and thus get lower rates, even for customers with dings in their individual credit histories, Myers and Fuller say.
And, they say, there’s more bad news: the expense to dealerships of obtaining credit histories and the added time required for F&I staff to comply.
In its appellate brief, NADA said the FTC interpretation means that dealers who don’t need to review a credit history must purchase a customer’s credit report “simply to comply, even though the consumer report and credit score purchased by the dealer may not be the same report and score actually used by the finance source to make its credit decision.”
Myers warns that creates the possibility of lawsuits by unhappy customers and plaintiffs’ attorneys if information in the credit report pulled by the dealership differs from that in the report obtained by the lender.
The Risk-Based Pricing Rule was issued under the Fair and Accurate Credit Transaction Act. The FTC’s interpretation of the rule states that dealerships that don’t obtain consumer credit reports still “use” them when there’s a credit contract based on third-party lenders’ use of those reports.
The rule is intended to protect borrowers who -- based on their credit histories -- are offered credit at “materially less favorable terms” than available to “a substantial proportion of consumers.” In such circumstances, prospective buyers are entitled to a risk-based pricing notice warning them of possible negative information in their credit reports.
NADA sued, arguing that the FTC’s interpretation of the rule is arbitrary and capricious and that it exceeds the commission’s legal authority.
U.S. District Judge Ellen Huvelle rejected NADA’s position last May, saying: “Even if compliance with the interpretation could create ‘awkward and burdensome’ situations, as NADA suggests, that does not render it unreasonable.” And NADA’s own interpretation of the rule “could result in the confusing situation where consumers receive multiple notices or no notices at all,” she said.
NADA vowed to appeal, calling the FTC’s interpretation “flawed, unnecessary and burdensome to many dealers by requiring them to purchase credit reports for no purpose other than to comply with the Risk-Based Pricing Rule.”
A Court of Appeals panel heard arguments in the case in February. But on March 5, NADA filed its motion for voluntary dismissal.
The post-argument withdrawal of the appeal irked at least one member of the panel handling the case. Said Judge Laurence Silberman: “To dismiss a month after argument -- at a point when the panel may well have virtually completed its work -- is, in my view, both unwise and particularly bad form.”