April 2009 - Feature
Part II: Tackling Adverse Action Notices
By Jim Ganther
As the old saying goes,
timing is everything, especially when it comes to adverse action notices.
Equally important is the content of an adverse action notice, especially given
the penalties associated with noncompliance.
Any creditor failing to comply with a
requirement imposed by the Equal Credit Opportunity Act (ECOA) or Reg. B is
subject to civil liability for actual and punitive damages of up to $10,000 in
individual actions, and up to $500,000 (or one percent of the creditor’s net
worth, whichever is less) in class actions. This excludes recovery of costs and
reasonable attorney’s fees.
Under the Fair Credit Reporting Act
(FCRA), a dealership’s liability can be divided into two categories: civil
liability to a consumer for noncompliance, and exposure to civil penalties in
enforcement actions brought by federal or state authorities. A court will also
distinguish if a violation under the FCRA is willful or negligent.
A dealership found to have willfully
violated the FCRA is liable to affected consumers in an amount equal to the sum
of any actual damages sustained by the consumer, or statutory damages of no
less than $100 (and nor more than a $1,000) per violation. A court will also
determine what punitive damages it will allow, as well as court and attorney’s
fees the customer can recover.
A negligible violation of the FCRA means
a dealer is liable to affected consumers in an amount equal to the sum of any
actual damages sustained by the consumer, as well as court and attorney’s fees.
Currently, courts are divided on whether
amendments to the FCRA in 2003 eliminated consumers’ rights to sue for adverse
action notice violations. Regardless of the divide, it is recommended dealers
comply with the FCRA requirements, as a dealership may also be liable for civil
penalties in an enforcement action brought by the Federal Trade Commission
(FTC) or a state attorney general.
ECOA Content Requirements
Although the content of an adverse action
notice will fall beyond the purview of the F&I department, the ECOA does
require the notice to contain a specific reason for the dealership’s inability
to secure financing. This is information an F&I manager will provide.
Dealers can also make use of a
“simplified notice.” It should contain language notifying the customer of his
or her right to receive a statement if the request is made within 60 days of
the notice.
Since the simplified notice requires that
the individual issuing the notice be listed, care must be taken in selecting
the individual assigned this task. The Association of Finance and Insurance
Professionals (AFIP) recommends designating a corporate officer (e.g., F&I
director or comptroller) who is well versed in F&I practices and the
requirements set forth by the ECOA and the FCRA.
It is also recommended that the dealer
principal, competent counsel, and those responsible for F&I operations
consult the Federal Reserve Board’s model forms (and the simplified adverse
action notice derived from these forms) in developing a roster of acceptable
reasons for denial.