Identity Theft Update -- Just the FACTs ma'am

Signed into law on December 4, 2003, the Fair and Accurate Credit Transactions Act (FACT Act), Public Law 108-159, changed the state and federal relationship on protecting consumers from identity theft.

The FACT Act makes permanent the preemption of state laws as described in the Fair Credit Reporting Act.  These seven preemptions were scheduled to sunset January 1, 2004, if Congress had not acted to make them permanent.  The areas include determining what information may be included in consumer reports, setting the procedures when consumers dispute the accuracy of information contained in consumer reports, and prescribing the exchange of information between affiliated financial institutions.

The FACT Act goes further to set national uniform standards for nine specific identity theft prevention and mitigation provisions: 

• Authorizes fraud alerts be placed on consumer files for 90 days if requested by the consumer;
• Requires credit bureaus to block fraudulent information in a consumer's file when the consumer provides an identity theft report filed with a law enforcement agency;
• Requires debt collectors, when notified that a debt is fraudulent, to notify the company holding the debt and provide the consumer a notice of consumer rights in debt collection;
• Prohibits no more than the last five digits of a credit card or debit card number from being printed on receipts;
• Requires the Federal Trade Commission (FTC), National Credit Union Administration (NCUA) and the other banking regulators to create procedures for identifying ID theft patterns and practices, such as "red flag" guidelines;
• Authorizes consumers to request that their Social Security numbers not be printed in consumer reports mailed to them;
• Requires the FTC to develop a model for a "summary of rights" to be given to consumers when they contact consumer reporting agencies;
• Requires the credit bureaus to create and maintain procedures for referring consumer ID theft complaints; and
• Authorizes victims to request copies of records from companies that provided credit to an ID thief.

The FACT Act also allows consumers to request one free consumer report annually.  Although states are preempted in the nine specific areas listed above, they are free to act on issues not mentioned in the FACT Act.  These include use of Social Security numbers, database hacking alerts, criminal penalties for identity theft crimes, requirements for law enforcement agencies to take police reports and the destruction of customer records.

And the Spending Goes On . . .

Every month, the Federal Reserve Board measures the outstanding consumer credit, including credit card debt, loans for cars, boats and mobile homes and educational loans.  Home mortgages, home equity loans and other real estate loans are not included in the statistical analysis.  In January, new consumer debt rose in the biggest increase in eight months at a 9.5 percent rate or $15.8 billion.  In comparison, consumers’ borrowing increased 2.5 percent or $4.2 billion in February.  In recent remarks, Federal Reserve Chairman Alan Greenspan said that even though consumers are carrying heavy debt loads, low interest rates and extra cash from refinancing have helped people manage their debt.

To Markup or Not Markup, That is the Question

As a result of recent lawsuits and consumer studies, questions regarding the practice of auto loan markups are on the rise.  At issue is the industry-wide practice of auto finance markups.  When a customer buys a car with financing arranged by the auto dealership, the lender quotes the dealer a "buy" rate, the rate at which the customer is approved for a loan based on the customer's credit history.  Then, the dealer adds percentage points to the rate offered by the lender and offers the loan to the customer.  Once the customer completes the loan transaction, the lender and the dealership split the difference from the markup.  The money the dealer receives back from the lender is known as the dealer reserve.  Typically, the "buy" rate, the percentage point markup and the dealer reserve are not disclosed to the customer.

While auto loan markups occur industry-wide, there are concerns that the markups tend to fall heaviest on minorities, particularly African-Americans and Hispanics.  The Consumer Federation of America published "The Hidden Markup of Auto Loans:  Consumer Costs of Dealer Kickbacks and Inflated Finance Charges," which details the statistics from several studies on auto loan financing.  According to the studies, African-Americans pay, on average, an annual rate of 9.01 percent and Hispanics pay 8.52 percent compared to 7.38 percent for all other households for loans on new cars.

Two class-action lawsuits filed in federal court in Tennessee have challenged the practice of auto finance markups.  One lawsuit was filed against Nissan Motors Acceptance Corp. (NMAC) on behalf of car buyers nationwide, and the other lawsuit was filed against General Motors Acceptance Corp. (GMAC) on behalf of car buyers in Tennessee.  Ford Motor Co., Honda Motor Co., Toyota Motor Corp. and DaimlerChrysler are involved in similar lawsuits.

In a settlement reached in June 2003, NMAC will offer preapproved "no markup" loans based on customer creditworthiness to current and potential black and Hispanic Nissan owners and NMAC will cap the markup dealers may charge at three percent for new car purchases and two percent for used car purchases.  The company will also contribute $1 million over the next five years to low-income and minority consumer education programs.  In February 2004, GMAC also agreed to settle.  As part of its settlement agreement, GMAC will impose a 2.5 percent markup cap on loans with terms up to 60 months, and a cap of two percent on extended term loans.  In addition, GMAC will create a substantial credit program designed to provide minority car buyers with special rate financing.

Legislation is pending in California, Illinois, Louisiana and New York regarding disclosure requirements for auto financing contacts.  Louisiana's legislation would place a cap of three percent between the "buy" rate and the annual percentage rate.

The National Automobile Dealers Association Board of Directors voted in February to support disclosing that a dealership may receive a portion of the finance charge or other compensation for helping to obtain financing, and that the finance rate may be negotiable.