You go to buy a car. You have cash or financing in hand, but the dealer says, "Sorry, federal law requires a credit check. The Patriot Act, you know."
Don't fall for it. That's a phony excuse to try to size you up, creditwise, and make an extra buck off you. Unless you decide to finance through the dealer, getting your credit pulled will do just one thing: drive down your credit score.
Under the Fair Credit Reporting Act, a car dealer may pull your credit -- if you consent by filling out and signing a loan application. However, when paying with cash or prearranged financing, a dealer has no right to coerce you to agree to a credit check by invoking the USA Patriot Act, the 2001 federal anti-terrorism law.
Yet, it happens. Wanda Dunbar, 70, and her husband went to buy a new car from a dealer near Palm Springs, California. The couple planned to pay cash, but the dealer told them the Patriot Act required him to run a credit check.
"The dealer said he had to make sure that we were who we said we were and that we weren’t terrorists," she says.
The Patriot Act and credit checks
If you truly want a loan from a car dealership, applying is straightforward: You fill out a credit application, the dealer runs your credit and shops around for a loan. If you get approved, you sign on the dotted line and the dealer makes a commission from the lender. In many cases, dealers mark up the interest rates on loans and split the proceeds with the lender.
Acting as a financing middleman is one of the top ways dealers make money, says Randy Henrick, a private consultant and president of AutoDealerCompliance.net. So even if you walk into the dealership with a wad of cash or a preapproved auto loan you got on your own, the dealer has a financial incentive to persuade you to change your mind and apply for a loan affiliated with his dealership.
Most dealers' salespeople follow the rules, while trying their best to make a sale. They'll ask a customer to fill out a credit application, but if the prospective buyer declines, the salesperson just moves on and tries other means to make the sale profitable. Floor mats? Undercoating?
Shady dealers, though, ramp up the pressure and invoke the Patriot Act. Many fall for the ploy. "Most people have no idea what’s in the Patriot Act," Henrick says.
Unethical salespeople go further, and conduct an illegal credit check. When you give over your driver's license for a test drive, the information on the license is all they need to run your credit.
"What a lot of dealers do is pull a credit report while a customer is out for a test drive and then try to undercut the financing the customer got from a credit union or bank," Henrick says.
Some basis in reality: Car dealers check for terrorists
Auto dealers also might mention the Patriot Act to customers because federal law does require dealers to take measures to fight terrorism and other crime.
For example, Hendrick says, car dealers must check all car buyers against the U.S. Department of Treasury Office of Foreign Assets Control list of specially designated nationals and blocked persons. The Patriot Act clarified this requirement, adding auto dealers to the list of businesses that must conduct a check.
"The OFAC list is generally people who are sympathetic with or involved with foreign terrorist groups," Henrick says, adding that no one in the United States is supposed to make a sale to anyone on the list.
"You literally cannot sell a pack of gum to somebody on the list, though in the real world the guy at the candy store doesn't check," he says.
A car dealer starts by simply running your name through the OFAC list, usually using specialized software. If the dealer gets a hit, they go through seven steps to try to verify the match, Henrick says.
"You don’t need a Social Security number," says Jeff Ostroff, CEO of CarBuyingTips.com. "All you have to do is bounce the name off that list. It's something you can do in five seconds."
Another federal law requires car dealers and other businesses to fill out IRS Form 8300 if they receive a cash payment of $10,000 or more from a customer, Henrick says.
They should also fill out the form for lower cash payments if they spot red flags suggesting the money came from drug sales, money laundering or other illegal activity.
None of these regulations requires a credit check. "If you’re not financing a car, there's no reason for them to check your credit," Ostroff says.
Unnecessary credit checks linger, sting
Credit checks bring down your score and cost you when you apply for future credit.
Authorized or not, a "hard pull" or hard inquiry happens when a lender checks your credit to decide on a loan application. A hard inquiry can drop your score by about five points and remains on your credit reports after about two years.
The effects can linger, and they sting. Dunbar and her husband, in California, filled out a credit application after the car dealer mentioned the Patriot Act. They then paid cash for the car, as planned. When they later applied for a mortgage, the bank told them that having auto loan inquiries but no auto loan on their credit made it look as if they'd been turned down for the loan.
The ding from the inquiry and the cloud of suspicion about whether they'd been rejected by an auto lender prevented them from getting a great interest rate on a mortgage. "I'm so mad about this," Dunbar says.
How to avoid unnecessary credit checks at car dealers
- Be upfront with the dealer. If you know you won’t get a loan through the dealer, make it clear right away.
- Make bundling work for you. Already approved for a car loan? If you act quickly, you can ask if the dealer can beat the terms without adding an extra ding to your credit. Multiple auto loan inquiries in a short time period, usually 30 days, are bundled and counted as one inquiry.
- Know your rights. A dealer does not need to check your credit to sell you a car. Ask any dealer who cites the Patriot Act or any other law to show you the statute in writing. "They won't be able to," Ostroff says.
- Check your credit, challenge unauthorized hard pulls. Go to annualcreditreport.com and pull at least one of your credit reports to see whether a dealer has run a credit check on you without authorization. If one has, dispute the error on your credit report.
Know your rights and follow these rules of the road, and you'll be able to drive off the lot with credit as shiny as your new car.
See related: The hard and fast rules of hard inquiries
Editor's note: This story, "Buying a car? Don't fall for the Patriot Act credit check scam" originally was posted on CreditCards.com.