BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 2118 (Hernandez)
As Amended March 11, 2010
Hearing Date: June 29, 2010
Fiscal: No
Urgency: No
BCP:jd
SUBJECT
Vehicle Dealers: Consumer Credit Score Disclosure
DESCRIPTION
Existing law requires car dealers who finance a motor vehicle
sale to disclose the buyer's credit score(s) that were obtained
and used by the dealer, the range of possible credit scores
established by the credit reporting agency, and provide the
buyer with a written notice regarding credit scores.
This bill would remove that requirement, and, instead, require
dealers to provide a credit score disclosure form that complies
with a recent federal regulation, as that section may be
amended.
BACKGROUND
In 2005, AB 68 (Montanez, Chapter 128, Statutes of 2005),
enacted the Car Buyer's Bill of Rights that required, among
other things, car dealers who finance a motor vehicle sale to
disclose the buyer's credit score(s) that were obtained and used
by the dealer, the range of possible credit scores established
by the credit reporting agency, and provide the buyer with a
written notice regarding credit scores. Dealers are currently
complying with those requirements by providing consumers with a
one-page disclosure that includes the consumer's credit score
received from up to four credit reporting agencies, the score
range and contact information for each of those agencies, and
the required statutory notice about credit scores.
Concerns have arisen about how that current disclosure form
(more)
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interacts with regulations recently adopted by the Federal Trade
Commission (FTC) regarding "Risk Based Pricing." Those
regulations generally require a creditor to provide a consumer
with a notice when, based on their credit report, the creditor
provides credit on less favorable terms than for other
customers. Due to issues in determining which customers may
fall into that category, the FTC's regulation permits a specific
notice to be provided to every customer that applies for credit
- that notice must contain certain pieces of information,
including the current or most recent credit score, range of
possible credit scores, and distribution of credit scores among
consumers, as specified.
This bill, sponsored by the California New Car Dealers
Association, would amend the Car Buyers Bills of Rights to,
instead, require dealers to provide a disclosure that meets the
requirements of the above federal regulations. To accomplish
that result, this bill would strike the existing notice and
insert a cross-reference to the specific federal regulation.
CHANGES TO EXISTING LAW
Existing law requires a dealer that obtains a credit score from
a consumer credit reporting agency for use in connection with an
application for credit initiated by a consumer for the purchase
or lease of a motor vehicle for personal, family, or household
use, to provide, prior to the sale or lease of the vehicle, the
following information to the consumer in at least 10-point
boldface type on a document separate from the sale or lease
contract:
the credit score obtained and used by the dealer and the
name of the credit reporting agency providing the credit
score to the dealer; and
the range of possible credit scores established by the
credit reporting agency that provided the credit score.
(Veh. Code Sec. 11713.20.)
Existing law additionally requires the dealer to provide a
specified statutory notice, which must include the name,
address, and telephone number of each credit reporting agency
providing a credit score that was obtained and used by the
dealer. (Veh. Code Sec. 11713.202.)
Existing federal regulation requires dealers to provide a
"risk-based pricing notice" to specified consumers, but states
that that notice need not be provided if the consumer requests
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an extension of credit other than credit that is or will be
secured by one to four units of residential property, and
provides a notice that includes the following:
a statement that a credit report is a record of the
consumer's credit history and includes information about
whether the consumer pays his or her obligations on time
and how much the consumer owes to creditors;
a statement that a credit score is a number that takes
into account information in a consumer report and that a
credit score can change over time to reflect changes in the
consumer's credit history;
a statement that the consumer's credit score can affect
whether the consumer can obtain credit and what the cost of
that credit will be;
the current credit score of the consumer or the most
recent credit score of the consumer that was previously
calculated by the consumer reporting agency for a purpose
related to the extension of credit;
the range of possible credit scores under the model used
to generate the credit score;
the distribution of credit scores among consumers who
are scored under the same scoring model that is used to
generate the consumer's credit score using the same scale
as that of the credit score that is provided to the
consumer, as specified;
the date on which the credit score was created;
the name of the consumer reporting agency or other
person that provided the credit score; and
a statement that the consumer is encouraged to verify
the accuracy of the information contained in the consumer
report and has the right to dispute any inaccurate
information in the report. (16 C.F.R. 640.5(e).)
This bill would revise the above dealer requirements by striking
the existing statutory form and attached requirements, and,
instead, require the dealer to provide the consumer with a
credit score disclosure notice that meets the form and content
requirements of the above federal regulation, as that section
may be amended.
COMMENT
1. Stated need for the bill
According to the author:
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The Federal Trade Commission (FTC) recently adopted new
"Risk Based Pricing" regulations that require businesses
that use credit reports to make financing decisions to
provide a notice to a limited category of consumers who are
granted credit on terms "materially less favorable than the
most favorable terms available to a substantial proportion
of consumers." Since it would be extremely difficult for the
average car dealer to undertake a complicated statistical
analysis to determine which customers fall into the above
category, FTC's final rule permits dealers to instead
provide every customer applying for credit with a new
federal credit score disclosure form containing the
consumer's credit score and relevant information concerning
their credit score. The new federal credit score disclosure
notice is more comprehensive than, and improves upon, the
credit score disclosure notice currently required by the
California Vehicle Code.
Since the FTC regulations (which take effect January 1,
2011) allow dealers to provide credit score disclosures in
lieu of risk-based pricing notices, state legislation is
needed to harmonize California's credit score disclosure
requirements with the new FTC rules. Without this change,
dealers would be faced with providing two separate credit
score disclosures, adding unnecessary expense and confusing
customers.
2. Opposition's concerns
To accomplish the sponsor's goal of requiring dealers to only
provide one disclosure - instead of the current California
disclosure and the one required by the FTC - this bill would
strike the existing disclosure and, instead, require a
disclosure that meets the form and content specified in the
federal regulation, as that section may be amended. While the
opposition has several different, but related concerns about the
present version of the bill, there does not appear to be an
objection to allowing car dealers to use the federal form. The
sponsor asserts that the new form is "more comprehensive than,
and improves upon, the current credit score disclosure notice .
. ."
a. Cross-reference to a federal regulation
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This bill would require a dealer that obtains a credit score
to provide to the consumer, prior to sale, a disclosure notice
that meets the requirements of the federal regulation, as it
may be amended.
By cross-referencing a federal regulation, and including any
amendments thereto, this bill would essentially modify
California law every time the federal regulation changes -
regardless of whether that change is better, or worse, for
consumers. Those subsequent changes, which are impossible to
predict, would go into effect without Legislative approval.
Unlike circumstances where a statute has authorized a state
agency to create regulations that are confined within certain
parameters created by the Legislature, the current
cross-reference would leave the contents of the disclosure
entirely in the hands of the FTC. From a policy standpoint,
allowing the FTC to determine the contents of a California
disclosure would appear to constitute an improper delegation
of legislative authority.
The National Consumer Law Center (NCLC), in opposition,
expresses concern that since the federal regulation is only
enforceable against auto dealers by the FTC that a court
"could conclude that Vehicle Code Section 11713.20 [(the
disclosure at issue)], because it incorporates a federal
regulation that only permits its enforcement by federal
regulators, cannot be enforced by the California DMV or
injured customers." The sponsor disputes that contention and
maintains that "[b]y incorporating the new federal rule into
the California Vehicle Code, a violation of the rule would be
enforceable under both federal law . . . and state law . . ."
NCLC also asserts that the regulation could be deleted or
moved, which arguably would have the effect of gutting Vehicle
Code Section 11713.20.
Considering the above issues regarding the proposed
cross-reference, the committee should consider whether it
would be more appropriate to, instead, remove the
cross-reference and codify the appropriate portions of the
federal regulation in California law. Although the sponsors
would have to return to the Legislature if the regulation
changes, that amendment would ensure that the Legislature has
an opportunity to evaluate those future changes and make a
policy decision about whether or not they should be
incorporated into California law.
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SHOULD THE CROSS-REFERENCE BE REMOVED AND REPLACED WITH
LANGUAGE FROM THE FEDERAL REGULATION?
b. Credit score
Under existing law, California's disclosure must include the
"credit score obtained and used by the dealer and the name of
the credit reporting agency providing the credit score to the
dealer." In comparison, the federal regulation requires
disclosure of the "current credit score" or the "most recent
credit score of the consumer that was previously calculated by
the consumer reporting agency for a purpose related to the
extension of credit." Concerns have arisen about what score
would be disclosed pursuant to the language of the federal
regulation. Specifically, Consumers for Auto Reliability and
Safety (CARS), in opposition, maintains that:
A consumer may have multiple credit scores - for example,
a FICO score and a VantageScore score. Also, a dealer
may use a totally different score that they would not
have to disclose. Under the new Federal rule, the dealer
could rely on one score for purposes of extending credit
in a transaction, but arguably provide the consumer with
another score that would qualify as "the current credit
score." This would make it more difficult for victims of
discriminatory or predatory lending or law enforcement
agencies to prove the dealer had engaged in unlawful
practices.
Numerous cases brought on behalf of victims of predatory
and discriminatory auto lending have shown that dealers
are prone to misrepresent consumers' creditworthiness in
order to justify charging excessive interest rates. Like
mortgage brokers, auto dealers receive hidden,
undisclosed kickbacks from lenders in exchange for
raising the interest rate on auto loans.
NCLC further asserts that "major credit bureaus have been
pushing their own products that do not rely on FICO scoring
models, including the VantageScore score. Advocates have
dubbed these non-FICO scores 'FAKO' scores, using different
models and even scoring ranges from FICO scores, potentially
leading to consumer confusion. . . . AB 2118 would allow auto
dealers to provide consumers with these FAK-O scores."
To address concerns that the language in the federal
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regulation may permit a dealer to disclose a score other than
one that was actually used, the Committee should consider
whether the bill should be amended to clarify that the score
disclosed must be one that was actually used by the dealer.
That clarification would appear to address concerns about
disclosing scores that were pulled but not actually used in
the credit decision.
SHOULD THE BILL BE AMENDED TO REQUIRE DISCLOSURE OF A SCORE
THAT WAS ACTUALLY USED?
Committee staff notes that under certain circumstances a
dealer may actually use multiple scores in making a credit
decision. This bill (with the above amendment), consistent
with federal regulation, would only require disclosure of one
score - both proponents and opponents appear to agree that
multiple disclosures may be burdensome and confusing for
consumers. In making the decision to require only one
disclosure - the FTC concluded: "The Agencies believe it is
appropriate to require disclosure of only a single credit
score because requiring disclosure of multiple scores would
unnecessarily increase the complexity of the notices and
increase the compliance burden for creditors. Requiring
disclosure of multiple scores in these circumstances also
would require disclosure of accompanying information for each
score, which would increase the length of the notices,
especially if the creditor disclosed how the consumer's score
compared to other consumers' scores in the form of bar graphs.
Moreover, the Agencies believe consumers may not benefit from
this additional information, could be confused by the
disclosure of multiple scores, and could be less likely to
read a longer form."
3. Author's amendment to address concerns
In response to the above concerns, the author offers the
following amendment to remove the reference to federal law and,
instead, codify the requirements of the federal form in state
law. At the time of writing of this analysis, it is unclear
whether that amendment will resolve all of the concerns of the
opposition due to language in the amendment that would require a
dealer to provide "a", as opposed to "the," credit score used.
Committee staff notes that the use of "a" as opposed to "the" is
intended to address a situation where a dealer uses more than
one credit score to make a decision -- in that circumstance, the
dealer (consistent with the FTC's regulation) may disclose just
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one of the scores actually used.
Author's amendment:
Strike out entire contents of the bill and insert:
SECTION 1. Section 11713.20 of the Vehicle Code is amended to
read:
11713.20. (a) A dealer that obtains a consumer credit score,
as defined in subdivision (b) of Section 1785.15.1 of the
Civil Code, from a consumer credit reporting agency, as
defined in subdivision (d) of Section 1785.3 of the Civil
Code, for use in connection with an application for credit
initiated by a consumer for the purchase or lease of a motor
vehicle for personal, family, or household use, shall provide,
prior to the sale or lease of the vehicle, the following
information to the consumer in at least 10 point boldface type
on a document separate from the sale or lease contract:
(a) The (1) A credit score obtained and used by the dealer
and the name of the credit reporting agency providing the
credit score to the dealer.
(2) The following information:
(i) A statement that a consumer report (or credit report) is
a record of the consumer's credit history and includes
information about whether the consumer pays his or her
obligations on time and how much the consumer owes to
creditors;
(ii) A statement that a credit score is a number that takes
into account information in a consumer report and that a
credit score can change over time to reflect changes in the
consumer's credit history;
(iii) A statement that the consumer's credit score can affect
whether the consumer can obtain credit and what the cost of
that credit will be;
(iv) The range of possible credit scores under the model used
to generate that credit score;
(v) The distribution of credit scores among consumers who are
scored under the same scoring model that is used to generate
the consumer's credit score using the same scale as that of
the credit score that is provided to the consumer, presented
in the form of a bar graph containing a minimum of six bars
that illustrates the percentage of consumers with credit
scores within the range of scores reflected in each bar, or by
other clear and readily understandable graphical means, or a
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clear and readily understandable statement informing the
consumer how his or her credit score compares to the scores of
other consumers. Use of a graph or statement obtained from the
person providing the credit score that meets the requirements
of this paragraph is deemed to comply with this requirement;
(vi) The date on which the credit score was created;
(vii) The name of the consumer reporting agency or other
person that provided the credit score;
(viii) A statement that the consumer is encouraged to verify
the accuracy of the information contained in the consumer
report and has the right to dispute any inaccurate information
in the report;
(ix) A statement that federal law gives the consumer the right
to obtain copies of his or her consumer reports directly from
the consumer reporting agencies, including a free report from
each of the nationwide consumer reporting agencies once during
any 12-month period;
(x) Contact information for the centralized source from which
consumers may obtain their free annual consumer reports; and
(xi) A statement directing consumers to the Web sites of the
Federal Reserve Board and Federal Trade Commission to obtain
more information about consumer reports.
(b) A dealer may use a form that meets the requirements of
Section 640.5(e)(5), of Title 16 of the Code of Federal
Regulations, as promulgated on January 15, 2010, to comply
with the requirements of this section, provided that the
requirements of subdivision (a) are met.
(a) The credit score obtained and used by the dealer and the
name of the credit reporting agency providing the credit score
to the dealer.
(b) The range of possible credit scores established by the
credit reporting agency that provided the credit score.
(c) The following notice, which shall include the name,
address, and telephone number of each credit reporting agency
providing a credit score that was obtained and used by the
dealer:
"NOTICE TO VEHICLE CREDIT APPLICANT
If the dealer obtains and uses a credit score from a credit
reporting agency in connection with your application to
finance the acquisition of a vehicle, the dealer must disclose
the score to you.
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The credit score is a computer generated summary calculated
by a credit reporting agency at the time the dealer requests
the score and is based on information the credit reporting
agency has on file. The scores are based on data about your
credit history and payment patterns. Credit scores are
important because they are used in determining whether to
extend credit. The score may also be used to determine the
annual percentage rate you may be offered. Credit scores can
change over time, depending on your conduct, how your credit
history and payment patterns change, and how credit scoring
technologies change. Credit scores may also vary from one
credit reporting agency to another.
If you have questions about your credit score, contact the
credit reporting agency at the address and telephone number
provided. The credit reporting agency does not participate in
the decision to take any action on your application for credit
and is unable to provide you with specific reasons for any
decision on the credit application.
If you have questions concerning credit terms relative to
your purchase or lease of a vehicle, ask the dealer."
(d) (c) This section does not require a dealer to provide
more than one disclosure for each purchase or lease
transaction.
(e) (d) This section does not apply to the purchase or lease
of a motorcycle or an off-highway motor vehicle subject to
identification under Section 38010.
(e) Nothing in this section shall be construed to limit or
restrict any rights or remedies otherwise available under
existing law.
Support : None Known
Opposition : Center for Responsible Lending; Consumers for Auto
Reliability and Safety; Consumer Action; Consumers Union;
National Consumer Law Center
HISTORY
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Source : California New Car Dealers Association
Related Pending Legislation : None Known
Prior Legislation : AB 68 (Montanez, Chapter 128, Statutes of
2005) See Background.
Prior Vote :
Assembly Transportation Committee (Ayes 14, Noes 0)
Assembly Floor (Ayes 71, Noes 0)
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