Federal Dealer Compliance

Federal Lending Laws

Whether you offer “On the Spot Financing” or “Buy Here Pay Here” or any type of financing you will be required to follow strict Federal lending guidelines. Any dealer that sets down with a customer and assists the customer in gaining any type of financing must follow all Federal lending requirements or face Federal fines of up to $250,000.

The Truth in Lending Act

Any dealer that offers or assists a customer with financing must follow the Truth in Lending Act. The Truth in Lending Act requires you to disclose full credit terms to each and every customer before the loan application is signed.

The Truth in Lending Act also allows certain credit card transactions to be cancelled within a certain period of time. I have always advised dealers to never take the full purchase price of a vehicle by credit card payment. I have spoke to several dealers that have taken full payment by credit card, especially in internet transactions, only to have the credit card payment cancelled after the vehicle has been delivered to the customer. This can lead to a very messy situation that always involves costs for legal advice on how to reclaim the vehicle. I only take credit card payments for the down payment on a vehicle, up to $250.00, and never for the full purchase price of a vehicle.

The Truth in Lending Act does not limit the amount of interest you can charge your customer, remember this is regulated at the state level, but it does require you to disclose that actual interest rate at the time of the loan application.

The Truth in Lending Act requires you to disclose the following information in every loan transaction:
•The Entire Amount Financed
•The Entire Length of Time of the Loan
•A Complete Schedule of all the Payments
•A Complete Itemization of the Amount Financed
•The Annual Percentage Rate
•The Identity of the Creditor
•The Total Amount of all the Payments
•Any Pre-Payment Penalty Fees
•Any Late Payment Penalty Fees

Always consult with an attorney before interpreting the rules of the Truth in Lending Act

The Equal Credit Opportunity Act

The Equal Credit Opportunity Act is Federal legislation that ensures all credit applicants are given an equal chance to obtain credit. All creditors must follow these strict guidelines and must also disclose to a customer why there credit application was denied within 60 days.
When you sit down with your customers to take a loan application, whether your are offering on the spot financing, buy here pay here financing, or any type of financing
whatsoever, there are several questions you are prohibited from asking.

As a creditor you may not:
•Ask your customers to reveal their religion, sex, race, or national origin
•Ask your customers if they receive child support or alimony
•Ask your customers if they plan to start a family
•Ask for information about the customer’s spouse unless the spouse is also applying for credit
•Ask your customers if they are widowed or divorced
•Discourage your customers from applying for credit because they receive public assistance
•Discourage your customers from applying for credit because of their race, age, sex, or marital status
When determining whether or not to approve a loan you may never:
•Refuse to consider child support or alimony
•Assume a woman will stop working to raise children
•Differentiate between public assistance and employment income
•Refuse to consider income from pension or annuity payments
•Refuse to consider income from part-time employment
When you deny a customer’s credit application you must:
•Notify the customer within 60 days
•Give a detailed explanation of why the application was declined, such as “You haven’t been employed long enough” or “You income was to low”
•Never give vague explanations of credit denial such as “You have not received enough points on our credit scoring system” or “You have not met our minimum requirements”
•Be very specific on exactly why the credit application has been denied

It is very important to know credit applicants that have been denied equal lending opportunities under the Equal Credit Opportunity Act can receive punitive damages from your dealership for up to $500,000!

You must consult with an attorney before offering any type of financing. Please use these references to the Equal Credit Opportunity Act as a guide, not legal advice.

The Gramm Leach Bliley Privacy Act

The Gramm Leach Bliley Privacy Act went into effect recently in order to protect consumer’s financial information.

The Gramm Leach Bliley Privacy Act contains three parts:
•The Financial Privacy Rule
•The Safeguards Rule
•The Pre-Texting Rule

The Financial Privacy Rule of the GLB Privacy act requires automobile dealers, or any lending institution that assists a customer in gaining financing, to give a customer a privacy notice in writing that explains the dealer’s collection and sharing practices. You must provide this privacy statement in writing with each customer that applies for credit. When you are completing a credit application you must give your customer a copy of your privacy policy that explains in detail what you will do with the customer’s information.

The Safeguards Rule of the GLB Privacy Act requires you to safeguard your customer’s personnel and financial information. When you obtain your dealers license, most states require that you keep copies of all documents related to each transaction for three to five years or longer. As you maintain these records over the next several years you will be acquiring very large set of documents.

The Gramm Leach Bliley Privacy Act requires to you protect the privacy of all the people you purchase vehicles from and all the people you sell vehicles to.

If you store these customer’s files in a file cabinet, this law would require that you keep the cabinet locked to protect your customer’s privacy. If you are taking loan applications on your computer, or if you are storing the documents that you are required to keep as per your state laws, you will have to have an effective firewall in place to protect this information. If you store any customer information on your computer, the Gramm Leach Bliley Privacy Act requires you to have effective, up to date virus protection such as Norton Antivirus, McAfee Antivirus, or my personal favorite, Microsoft Live One Care. Another reason this Federal consumer protection law is in place is to make sure
computer hackers cannot gain access to your computer and steal your customer’s personal or financial information.

The Pre-Texting Rule of the GLB Privacy Act prohibits a dealer from the use of false information to assist the customer in obtaining financing. For example, if a customer says they earn $1000 per month and the dealer states the customer earns $1,500 per month on the loan application, this law would be violated. You must always obtain the correct information for all credit applications. If your customer lies or gives false information during the credit application, the customer would be in violation of this law. Remember you are obtaining this information to the best of your knowledge. If you think your customer is providing false income information, walk away from the deal.

Remember to obtain legal advice to make sure you are compliant with the Gramm Leach Bliley Privacy Act

Federal Trade Commission Red Flag Rules

The Federal Trade Commission Red Flag Rules require any automobile dealer that offers or brokers any type of financing to develop and implement, in writing, an identity theft prevention program to report any attempt at identity theft. The identity theft program must include a step by step policy for identifying and preventing identity theft and how you will report attempts at identity theft.

For example, if someone every tries to purchase a vehicle from you using someone else’s drivers license, you would be required to report the identity theft attempt to the Federal Trade Commission immediately. Under this law, you are also required to keep written document at your dealership that states how you identify the “Red Flags” of ID theft. You must make sure your identity theft program is updated periodically.
To report any attempt at identity theft or for questions about compliance with the Red Flag Rules, you may contact redflags@ftc.gov or call 1-877-382-4357.

Federal Trade Commission Red Flags Rule

•Identify Patterns, Practices, & Specific Forms of Activity That Are “Red Flags”
•Respond Appropriately To “Red Flags”
•“Red Flags” Program Must Be In Writing & Updated Periodically

United States Treasury Department Cash Reporting Requirements

Any dealer that receives more than $10,000 in one or more related transactions must report the transaction to the IRS. You must report the transaction on IRS Form 8300 within fifteen days of the transaction. You must also notify your customer that you have filed the transaction with the IRS before January 31 of the following year. You will then keep a copy of IRS Form 8300 in your files for five years. Any transaction that is one of a series of connected transactions must be reported.

This IRS Cash reporting law was placed into effect to help eliminate any type of illegal cash activities that may support criminal acts or any type of money laundering.

You will be required to report any cash transaction of more than $10,000 on IRS Form 8300. You will also be required to report any cashier’s check, money order, bank draft, or travelers checks with an amount $10,000 or less. A personal check for any amount is exempt. Any payment that is the result of a bank loan is normally exempt.

Many people wonder why you would not report a cashier’s check if the amount is over $10,000 but must report a cashier’s check under $10,000. The banks report cashier’s checks over $10,000. They also report any cashier’s check, bank draft, or money order that is the result of a loan. You will report any cash transaction of more than $10,000 and any cashier’s check, bank draft, money order, or travelers check with an amount of $10,000 or less, unless it is the result of a bank loan.

You must file IRS Form 8300 within 15 days of the transaction or face up to $25,000 in Federal fines. If that date falls on a Saturday, Sunday, or legal holiday you may file IRS Form 8300 on the next business day.

On IRS Form 8300 you will be required to provide a Taxpayer Identification Number of the person you are selling a vehicle to. You may be subject to Federal fines if you do not provide a correct Tax ID Number. The Taxpayer Identification Number for an individual, including sole proprietorships, is their Social Security Number. For anyone representing a corporation, partnership, or estate, the Taxpayer Identification Number is the Employer Identification Number. If you are unable to provide a Taxpayer Identification Number from a person who purchased a vehicle from your dealership within 15 days following the transaction you must still send in IRS Form 8300. You must also attach a statement in writing explaining why the Taxpayer Identification Number was not able to be obtained.

IRS Form 8300 may be filed for any suspicious transaction even if the total does not exceed $10,000. If you think your customer is involved in some type of illegal activity, you may file the form even if it is not required.

You must provide a written or electronic statement to the person you sold the vehicle to on or before January 31 of the year following the year in which the cash transaction took place.

I make a copy of the IRS Form 8300 that I sent to the IRS, write the date I filed
the form with the IRS at the top, then mail it to my customer before January 31 of the following year.

You may receive Federal fines if you fail report to your customers that you filed IRS Form 8300 before January 31 of the following year.

You may be subject to penalties of up to $25,000 if you fail to file a correct and complete Form 8300 on time and you cannot show that the failure was due to reasonable cause.

I have filed this form on several transactions over the last few years. On one occasion a customer paid twelve thousand dollars in cash for a motorcycle. I completed IRS Form 8300 and made three copies.

I sent the first copy to the Detroit IRS Computing Center (address located on the back of IRS Form 8300) within fifteen days of the transaction. I sent the second copy of IRS Form 8300 to my customer, (required before January 31 of the following year), at the top of the form I sent my customer I wrote “Filed with IRS on July 8”. I then placed the third copy in my files, which I will keep for at least five years.

You may download a free IRS Form 8300 at:
www.irsform8300.com

You must mail Form 8300 within 15 days of the transaction to:

Internal Revenue Service
Detroit Computing Center
P.O. Box 32621
Detroit, MI 48232
You must notify your customer that you filed the transaction with the IRS before January 31 of the following year.
You must keep a copy of Form 8300 in your files for a minimum of 5 years.

A minimum penalty of $25,000 may be imposed if the failure is due to an intentional or willful disregard of the cash reporting requirements.

Be sure to get legal advice regarding the Truth in Lending Act, the Equal Credit Opportunity Act, the FTC Red Flags Rule, IRS Form 8300 or any other Federal Compliance Issues