Risk-Based Exception Notice

Best Practice For Risk Based Exception Notices

As every successful businessperson knows, running a business is in large measure based on the premise of balancing risk and reward.

First established by the Federal Reserve Board and the Federal Trade Commission as a means of improving the accuracy of credit reports, Risk-Based Exception Notices for car dealers are critical tools in finding that elusive balance between risk and reward, and improving the accuracy of credit reports.

Under the Risk-Based Pricing Rule for auto dealers, customers whose credit applications have been approved—albeit on materially less favorable terms—must be alerted to the existence of negative information in their credit reports; by doing so, this provides the customer with the opportunity to check the report for accuracy and correct any erroneous information.

As an industry leader, NCC’s solution to the requisite Risk-Based Exception Notices for car dealers replicates the methodologies adopted by the Federal Reserve and the FTC.

In addition, Risk-Based Exception Notices for auto dealers carries with them certain requirements. According to the Federal Trade Commission (FTC), in general, dealers must provide a risk-based exception notice if they “use a consumer report in connection with an application for — or grant of credit for — personal, family, or household purposes to someone on less favorable terms than you grant to others.

“Consumers are entitled to only one notice per transaction; they are entitled to another notice only if the APR increases during an account review.”

NCC’s solution to the Risk-Based Pricing Rule replicates what was adopted by the Federal Reserve and the FTC.

Since 2011, the Risk-Based Pricing Rule for auto dealers has required dealerships that pull credit reports to evaluate a buyer’s credit worthiness, and to issue a notice to all buyers who request retail contract financing from them.

The NADA / NCC Solution

As a result of the difficulty in determining which transaction fit into the “less favorable” category, NADA successfully lobbied the Federal Reserve and the FTC to permit automobile dealers to issue an “Exception Notice” to all buyers that they finance, as an alternative to the risk-based pricing notice; the end result of this lobbying was the Risk-Based Exception Notice for car dealers.

The Risk-Based Pricing Rule for car dealers is provided after the credit score has been obtained, but before the time that the customer becomes contractually obligated.

And one final point: those failing to comply with the Fair Credit Reporting Act (FCRA) regulations may be sued by the Federal Trade Commission, Consumer Financial Protection Bureau, state governments, or in some cases, consumers.

The FCRA provides for maximum penalties of $3,500 per violation in the case of lawsuits brought by the FTC.

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