A Quick Review of Direct Mail Advertisements Can Prevent Unwanted Liability and Still Generate Dealership Traffic

Keith 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.

This information is provided by Keith Whann of the law firm Whann & Associates, LLC and is for general information purposes only. You should contact legal counsel for specific application.  Keith Whann August, 2002.