A Quick Review of Direct Mail Advertisements Can Prevents Unwanted Liability
While Generating Dealership Traffic
By: Keith E. Whann
As the economy and the creditworthiness of the average consumer have
slowly declined, dealers have begun to use more aggressive and innovative
advertising to generate dealership traffic. One example of a strategy
that has become increasingly popular in the motor vehicle industry
is the use of direct mailers to consumers who have impaired credit
(i.e. no credit, bad credit, or a recent bankruptcy discharge). Many
of the direct mailers utilized include claims that the dealership
provides “Financing for Everyone” and “Guaranteed Auto Loans.” Before
sending
these mailers out to a list of “prescreened” customers, dealers should
make sure they know who generated the list of potential customers
and what criteria was used because a whole host of laws may come into
play
in addition to the traditional advertising laws with which the dealership
must comply.
When generating a prescreened list, a dealership may provide a list
of individuals to a credit reporting agency, which then edits the list
to reflect those individuals who, according to the reporting agency’s
own files, meet certain credit criteria specified by the dealership.
In addition to credit information, the list may be sorted based upon
demographic or other criteria. In some cases, the dealership provides
a list of criteria and the reporting agency searches its databases and
creates a list from scratch.
Six years ago, Congress passed the Consumer Credit Reporting Reform
Act of 1996 (“Reform Act”), which made several changes to the Fair Credit
Reporting Act (FCRA). While most of the major changes to the FCRA addressed
issues of accuracy in consumer reports, another set of issues raised
by consumer advocates revolved around privacy, including prescreening
practices. As a result, the Reform Act amended the FCRA so that prescreening
reports may only be furnished if a consumer authorizes the furnishing
of the report or if the transaction “consists of a firm offer of credit
or insurance”. A “firm offer of credit or insurance” is defined as “any
offer of credit or insurance to a consumer that will be honored if the
consumer is determined…to meet the specific criteria used to select the
consumer for the offer…”. If a dealership intends to use prescreened
lists, it must establish the criteria that will be relied upon in making
the offer and in granting credit before the offer is made. A copy of
the criteria must be maintained on file for a three-year period beginning
on the date on which the offer is made to each consumer. In addition,
each written solicitation must include a clear and conspicuous statement
explaining that:
(1) Information contained in a consumer's credit reporting
agency file was used;
(2) The consumer received the offer because he or she satisfied the
criteria for credit worthiness used to screen for the offer; and
(3) Credit may not be extended if, after the consumer responds, it
is determined that the consumer does not meet the criteria used for
screening
or any applicable criteria bearing on credit worthiness.
The general rule is that the offer of credit or insurance will be honored
if, based on the information in the consumer report, the consumer meets
the criteria specified for the prescreened list. However, the definition
of firm offer allows three contingencies. The first contingency or condition
added to the definition of firm offer is that the user may require and
rely on the consumer’s application for the product or service offered.
For example, a dealership may require that information in the credit
application indicate that the consumer meets the predetermined selection
criteria for extending credit. The second condition is the dealership’s
right to verify that the consumer meets the criteria used to select the
prescreened list. Verification may be based on information in a consumer
report or in the consumer’s application for credit, or on other information
bearing on creditworthiness. The third condition is that the consumer
must provide sufficient collateral for the offered credit. Remember,
if the offer is contingent on various conditions being met, the direct
mailer must disclose the applicable exclusions and limitations.
Recognizing the potentially intrusive nature of direct marketing campaigns,
Congress further amended the FCRA to require consumer reporting agencies
that prepare prescreened lists to maintain a system that allows consumers
to “opt out” of having the information in his or her file used in connection
with future prescreened offers. Therefore, the mailer must provide a
clear and conspicuous statement advising the consumer that he or she
may opt out of future mailings by contacting a central notification system.
This statement must include both the address and toll-free telephone
number of the appropriate notification system. An opt-out notice to one
credit reporting agency is effective as to all of them. Unless the consumer
completes and submits a signed written form issued by the notification
system requesting permanent exclusion, the opt out notice is only effective
for a period of two years.
It is important to remember that there are numerous other federal and
state laws that regulate advertising which a dealer should consider before
distributing direct mailers to potential customers. Naturally, any advertisement
that deals with the extension of credit must comply with the Federal
“Consumer Credit Protection Act” and “Consumer Leasing Act” and their
implementing Regulations Z and M, more commonly known as the Truth in
Lending and Leasing Acts. The Acts are similar in nature to the extent
that they list certain “triggering terms” which, when used in an advertisement,
create an obligation on the advertiser to make additional mandated disclosures
in the advertisement.
In addition to the Federal Consumer Protection Credit and Consumer Leasing
Acts, State Unfair and Deceptive Acts and Practices (UDAP) Statutes and
the Administrative Rules promulgated thereunder also regulate the content
of advertisements. For example, most UDAP Statutes provide that any material
reservation, limitation or exclusion relating to the offer of a product
or credit be included in clear and conspicuous language. Statements such
as “financing for all,” “no credit rejected,” “we finance everyone,”
“bad credit, no problem,” or words which imply that credit is available
to all applicants, should not be used unless a summary of any of the
material terms and conditions relating to a consumer’s ability to obtain
credit are disclosed. Furthermore, the material reservation, limitation
and/or exclusion typically must be stated in close proximity to the words
stating the offer. Remember, placing an asterisk next to an offer to
refer to a footnote generally does not satisfy the close proximity requirement.
Additionally, all disclosures should be set forth in such a fashion that
they are easily legible, sufficiently specific, and leave no reasonable
probability of being misunderstood. Advertisements that fail to disclose
all material limitations or exclusions are inherently flawed and can
result in a transaction being rescindable at the consumer's option.
This article would not be complete if we didn’t remind dealers that
mandatory compliance with the contractual requirements for service providers
and joint marketers under the Federal Trade Commission’s Privacy Rule
was July 1, 2002. Dealers who have not done so already should take steps
to ensure that their contractual agreements with service providers and
joint marketers (i.e. companies hired to compile lists of potential customers
and send direct mailers) include a mutual agreement to keep the information
they share confidential and refrain from disclosing or using the information
other than to carry out the purposes for which the information was disclosed. |
