Adverse Action Q&A

(Includes information provided from NADA’s Management Series “A Dealer Guide to Adverse Action Notices” with permission from NADA)

1.  Do I need to give an adverse action notice?

This is an unsettled and evolving area of the law in which many courts and dealer attorneys disagree as to the scope of dealers’ compliance obligations.  Dealers are encouraged to seek legal advice before adopting any policy.   Given the unsettled nature of the law, we are providing the following information for dealers who have chosen to send adverse action notices.

Adverse action notices are governed by the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA).  ECOA requires creditors who “regularly participate in a credit decision” to provide an adverse action notice.  FCRA requires an adverse action notice (as defined in ECOA) be given to any person who was denied credit or turned down your counteroffer, and the decision was based on a consumer report or information from a third party.

On the subject of whether a dealer is a participating creditor, NADA’s publication, “A Dealer Guide to Adverse Action Notices” provides the following information:

“Unfortunately, the ECOA and its regulations are unclear as to what it means for a dealer to “regularly participate in a credit decision.” The courts have reached different conclusions in answering this question. In some cases, a dealer has been deemed to “participate in a credit decision” when the dealer merely forwards the customer’s application to a bank or finance company for its determination. Dealers also have been deemed to “regularly participate in a credit decision” in a spot delivery credit sale.  Under some interpretations, a dealer may “regularly participate in a credit decision” because the dealer regularly signs the retail installment sales agreement before sending it to a bank or other finance source.

Because of the uncertainty as to how this important question will be resolved by a court, if you regularly sign retail installment sales agreements with your customers, you should follow the ECOA rules for a “participating creditor,” including the adverse action notice requirements.”

2.  When must an adverse action notice be given?

As mentioned above, the Equal Credit Opportunity Act (ECOA) requires creditors (including dealers) to issue an “adverse action” notice to customers when the creditor refuses to grant credit on substantially the terms requested. A related law, the Fair Credit Reporting Act (FCRA), also may require a creditor to give an adverse action notice (which may be combined with the ECOA notice) if a credit report or information from a third party other than a consumer reporting agency (CRA) is involved in an adverse credit decision. Each law requires certain information to be included in the adverse action notice.  And, effective July 21^st, 2011, The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Law) requires additional information to be included in adverse action notices issued under the FCRA where a creditor used a consumer’s credit score in taking adverse action.

3.  What additional information do I need to provide in my adverse action notice effective July 21^st, 2011?

If a creditor uses a consumer’s credit score in taking adverse action, beginning July 21, 2011, the following additional information must be provided in adverse action notices:

• the consumer’s credit score;
• the date the score was created;
•  the range of possible credit scores under the model used to generate the score;
• the key factors that adversely affected the consumer’s credit score in the model used (you must list up to four key factors provided by the Consumer Reporting Agency  or up to five key factors if one of the factors is the number of recent inquiries.

4.  If a dealer doesn’t pull credit reports directly, but relies on a lender to do so in order to decide whether to accept assignment of a retail installment contract (purchase the paper), must the dealer give an adverse action notice including the credit score disclosure?

Yes.  The Federal Reserve Board has indicated that it may consider a finance source’s use of a credit report or credit score in taking an adverse action to be imputed to the dealer who sent the credit application to the finance source. As a result, dealers who do not obtain credit reports or credit scores may nevertheless be deemed to “use” a credit report or credit score if the finance source uses a credit report or score. Therefore, the conservative approach is for dealers to take steps to ensure that the new Dodd-Frank Law disclosures are included in their adverse action notices even in cases where they would not otherwise obtain a credit report or credit score.

5.  What is the time period for sending an adverse action notice?

• If you do not provide the requested financing, you must send the adverse action notice to the customer within 30 days after receiving a completed application. 
• If you make a counteroffer that the customer does not accept, you must send the adverse action notice within 90 days after notifying the customer of your counteroffer.
• If you receive an incomplete application and you neither receive the missing information nor send a “notice of incompleteness” you must send an adverse action notice to the customer within 30 days after receiving the incomplete application.

6.  How should an adverse action notice be sent to a consumer?

Adverse action notices may be given in person, via regular mail, fax, or electronically.  Electronic transmission requires that dealers comply with the E-Sign Act.

7.  What rules apply to incomplete credit applications?

If the customer’s credit application is incomplete, you have a choice of sending, in writing, within 30 days:

• An adverse action notice denying the application; or

• A “notice of incompleteness”

If you opt to send a notice of incompleteness, you must include 3 items in the written notice:

• The additional information you need;

• The time within which the customer must supply the additional information (this must be a reasonable period of time); and

• A statement telling the customer that you will not further consider the application unless the customer gives you the requested information within that time.

If the customer does not respond to the notice of incompleteness, you are not required to send an adverse action notice.

If the application is missing some information, but there is enough for you to make a credit decision, you may evaluate the application, make your credit decision, and notify the customer. If you decide to deny the application, you must send an adverse action notice with the required content, including the specific reason(s) for the denial (note that, in this instance, you cannot give “missing information” or “incomplete application” as the reason for denial) or a disclosure of the customer’s right to a statement of specific reasons if requested within 60 days of your notification.

8.  If I have joint applicants who share the same address, can I send only one adverse action notice, or send two notices in the same envelope?

No.   Because FCRA protects individual consumers’ rights with regard to how information about them is obtained and used, the FCRA adverse action notice must go to each consumer whose report was used in the decision to deny. 

Furthermore, if you receive a joint credit application and you use a credit score on each applicant in making an adverse action decision on the application, the Dodd Frank Law requires that you give the Dodd-Frank Law credit score disclosure notice to each applicant.  Each applicant can be given only his credit score and each applicant’s adverse action notice (incorporating their credit score) must be sent to each applicant separately.

9.  What are the penalties for failure to comply with Adverse Action requirements?

The penalties for violating ECOA:  (1) Actual Damages, (2) Punitive Damages, which are up to $10,000 in an individual action or the lesser of up to $500,00 or 1% of the creditor’s net worth in a class action, (3) Equitable and Declaratory relief, and (4) costs and attorney fees.