A Maryland couple arrived at their local Subaru dealership with their own financing, only to be told that they still needed to fill out a form required by the government because of the Patriot Act. When they hesitated, the salesman said regulations meant to identify money laundering by possible terrorists required that all customers fill out the form.
However, the couple later learned that the finance manager used the information to run their credit report without their permission. That check could have lowered their credit score.
There are times when a car dealer has good reason to pull your credit report, such as when you're seeking to finance through the dealership. As the dealership reviews your report, it will also be looking for any signs of identity theft or fraud, in compliance with what federal consumer-protection agencies call the "Red Flag Rules."
But industry experts, including attorneys from both the National Automobile Dealers Association (NADA) and the National Independent Automobile Dealers Association (NIADA), say that the Patriot Act does not require dealers to run a credit report on customers who pay cash.
However, laws designed to combat money laundering by terrorist organizations do require dealers to check the identification of customers paying more than $10,000 in cash and to report those transactions to the Internal Revenue Service on Form 8300. Paying with a cashier's check, money order or traveler's check also qualifies as a cash transaction, according to the IRS. (Oddly, a personal check does not qualify as cash, according to the IRS form's instructions. But it's the rare car dealer who would accept a personal check for a vehicle purchase.)
The Trouble With Running Credit Reports
Consumers should avoid having businesses run their credit reports unnecessarily because it will lower their credit rating slightly, consumer advice experts say. According to the Experian Web site: "10% of your credit score is based on inquiries or 'credit checks.' Every time you apply for credit, a 'hard inquiry' is placed on your credit report. Having too many hard inquiries could indicate to lenders that you're trying to overspend."
Car salesmen are eager to run a customer's credit report and often say it is for the buyer's convenience, and will speed up the car-buying process, says Chris Kukla, senior vice president of the Center for Responsible Lending. "But they really want to know if they can easily finance you," he says. "The result of the credit report has an impact on what the buyer pays for the car, and whether they get a hard sell for additional products in the finance and insurance office."
Marv Eleazer, finance director at Langdale Ford in Valdosta, Georgia, agrees. "This is a ruse and designed to get access to the customer's credit report in order to qualify a customer to various finance sources the dealer uses," he says.
Buy here, pay here car dealers often demand a credit report early in the car-buying process, Kukla says. Often, the car's price isn't even posted on the windshield. After seeing the result of the credit report, the dealer can adjust the price to maximize his profit, Kukla says.
Kukla says many car buyers with mid-tier credit assume they can only get financed at the dealership, and as a consequence, they arrive on the car lot with no idea of their credit worthiness. Instead, he tells car shoppers to look for a loan from a bank, credit union or other outside lender first. With pre-approved financing in hand, they are in a stronger position to negotiate at the dealership.
The Patriot Act Angle
How did the Patriot Act get entangled in all this? Lawmakers created the act, in part, to curtail money laundering by terrorists, says Shawn Petersen, regulatory legislative and compliance counsel for NIADA. To enforce that provision, the Office of Foreign Assets Control (OFAC) requires dealers to screen cash buyers to make sure they are not on a government terrorism watch list. But dealers don't need to run a credit report to satisfy that requirement.
In the case of the Maryland car buyers, the dealer said that its form for cash-transaction reporting and the one for running a credit report are similar. "There may have been some miscommunication between the sales rep, the sales manager and the finance manager," a dealership spokesperson explained.
So what information must dealers require from someone who is buying a car for cash in an amount over $10,000? Dealers must get the customer's name, address, date of birth, Social Security number and occupation, according to the Privacy Rights Clearinghouse, a nonprofit organization dedicated to raising consumers' awareness about personal privacy issues. The IRS form also requires the dealer to see a personal identification, such as a driver license, and to record that ID number.
While consumers must provide identifying information to buy a car for more than $10,000 in cash, they should not allow the dealer to run a credit report if they are not using dealership financing. The dealer must get a consumer's permission to run his or her credit report.
Here are a few tips from the experts to help car shoppers protect their credit history:
- Beware of early requests from the salesperson to run a credit report. This is a red flag that other sales practices may not be ethical.
- If you are using outside financing from your bank or credit union, the dealer is not required to run your credit report. But keep in mind that the dealership usually offers access to the best finance rates for qualified buyers. To get those rates, a credit report is required.
- Dealers are required to ask for identification, such as a driver license, from buyers who are purchasing a car for more than $10,000 in cash. They also must get a Social Security number or Tax ID Number.
- Shop around for a loan from an independent source such as a bank, credit union or online lender before going to the dealership.
- Only give the car salesperson permission to run your credit if you decide to finance at that dealership.
- At the car dealership, tell the salesperson you are a "cash buyer" (because you have pre-approved financing). But in the finance and insurance office, consider letting the dealer try to beat the interest rate on the loan you already have.