NEW RISK-BASED PRICING RULE

Reprinted with permission
World of Special Finance, April 2004

On February 20, representatives from the National Automotive Finance Association met with the staff of the Federal Trade Commission and the Federal Reserve Board to talk about how the non-prime auto financing business is conducted. The FTC is charged with creating regulations that bring business sectors into conformance with enacted legislation.

Late last year, the Fair and Accurate Credit Transactions Act of 2003 --- the FACT Act --- was passed by Congress and signed into law by the President. The FACT Act made many amendments to the Fair Credit Reporting Act, and the FTC must write at least 26 rules to implement those changes. Some of the rules are to be written in connection with the Federal Reserve Board. The "risk-based pricing" rule is one such rule.

The FTC is trying to establish a rule to govern when and to whom notice is given regarding terms that are less favorable than those given to a substantial portion of consumers. This applies to any customer who is granted credit based in part on a consumer credit report on terms. Of particular interest to the FTC were the different credit risks that a non-prime auto dealer and finance company faces.

Jim Bass, Chairman, Steve Hall, President of the NAF Association and Anne Fortney, partner, Hudson Cook LLP, along with Jack Tracey, Executive Director represented the NAF Association. Each contributed to the two-hour presentation that highlighted the uniqueness of non-prime auto financing and the differences with prime auto financing. The roles of both the auto dealer and the finance company were discussed.

The FTC recognizes the difficulty of establishing this rule to suit transactions dealing with non-prime applicants. The NAF Association team explained that the industry was built on a risk based pricing platform and that the industry attempted to balance credit risk with the rate charged. It is difficult to determine what terms "a substantial proportion" of the non-prime applicants receive with a broad based risk-pricing model. Many, if not all, of the non-prime borrowers may receive this notice when the ruling becomes effective.

The NAF Association will continue to monitor developments with the FACT Act. The issue also will be explored at the NAF Association1s 8th Annual Non-Prime Auto Financing Conference in Chicago, on June 16 to 18, 2004.

Jack Tracey, CAE, Executive Director
NAF Association