DMV Vehicle Financing and Credit Practices 2 — Questions and Answers
Question 1: The Equal Credit Opportunity Act (ECOA) prohibits a dealer or lender from discriminating against a credit applicant based on:
- Credit score and debt-to-income ratio
- Employment history and income level
- Race, color, religion, national origin, sex, marital status, or age (Correct answer)
- Number of previous vehicle purchases
Correct answer: Race, color, religion, national origin, sex, marital status, or age
ECOA prohibits credit discrimination based on protected characteristics including race, color, religion, national origin, sex, marital status, and age (provided the applicant has capacity to contract).
Question 2: Under the Fair Credit Reporting Act (FCRA), if a dealer takes an adverse action (denies credit) based on information in a consumer's credit report, the dealer must:
- Return the consumer's down payment immediately
- Provide the consumer with an adverse action notice including the name of the credit reporting agency used (Correct answer)
- Submit a report to the California DMV
- Offer the consumer an alternative financing arrangement
Correct answer: Provide the consumer with an adverse action notice including the name of the credit reporting agency used
FCRA requires that when adverse action is taken based on a credit report, the creditor must provide an adverse action notice identifying the consumer reporting agency whose report was used.
Question 3: What is 'negative equity' in a vehicle financing transaction?
- When the dealer owes the lender more than the vehicle's wholesale value
- When the outstanding loan balance on a trade-in vehicle exceeds its market value (Correct answer)
- When a buyer's credit score is below the lender's minimum threshold
- When the finance charge exceeds the vehicle's purchase price
Correct answer: When the outstanding loan balance on a trade-in vehicle exceeds its market value
Negative equity (being 'upside down' or 'underwater') occurs when a buyer owes more on a trade-in vehicle than it is worth, often resulting in that balance being rolled into the new loan.
Question 4: GAP (Guaranteed Asset Protection) insurance or a GAP waiver is primarily designed to protect a buyer against:
- Mechanical failures after the manufacturer warranty expires
- The difference between the insurance payout and the remaining loan balance if the vehicle is totaled or stolen (Correct answer)
- Dealer fraud or misrepresentation during the sale
- Increases in monthly payments due to rising interest rates
Correct answer: The difference between the insurance payout and the remaining loan balance if the vehicle is totaled or stolen
GAP coverage pays the difference between what a standard auto insurance policy pays (actual cash value) and the amount the buyer still owes on their loan if the vehicle is a total loss.
Question 5: Under the FTC's Red Flags Rule, auto dealers who extend credit are required to:
- Run a credit check on all employees before hiring
- Implement a written Identity Theft Prevention Program to detect and respond to warning signs of identity theft (Correct answer)
- Verify the vehicle identification number (VIN) against a theft database
- Report all cash transactions over $10,000 to the IRS
Correct answer: Implement a written Identity Theft Prevention Program to detect and respond to warning signs of identity theft
The FTC's Red Flags Rule requires dealers who are creditors to develop and implement a written Identity Theft Prevention Program that identifies, detects, and responds to 'red flags' indicating potential identity theft.
Question 6: When a buyer co-signs on a vehicle loan, they are legally responsible for:
- Only the down payment portion of the transaction
- Half of the outstanding loan balance
- The full loan amount if the primary borrower defaults (Correct answer)
- Providing insurance on the vehicle only
Correct answer: The full loan amount if the primary borrower defaults
A co-signer is equally liable for the entire debt; if the primary borrower defaults, the lender can pursue the co-signer for the full remaining balance.
Question 7: Which document must a California dealer provide to a buyer before the buyer signs a retail installment sale contract, showing the vehicle price, trade-in allowance, fees, and amount financed?
- The Dealer Report of Sale (DRS)
- The buyer's order or purchase agreement (Correct answer)
- The certificate of title
- The smog certification
Correct answer: The buyer's order or purchase agreement
The buyer's order or purchase agreement itemizes all financial terms of the deal — price, trade-in, fees, and net amount to be financed — and must be provided before the buyer signs the retail installment contract.
DMV Vehicle Financing and Credit Practices 2
The Equal Credit Opportunity Act (ECOA) prohibits a dealer or lender from discriminating against a credit applicant based on: