May 2009 - Feature
Tackling Adverse Action Notices
Knowing what triggers an adverse action notice can definitely be baffling, but so can the rules governing content and timing. Legal expert weighs in with part II of PSFI’s series on 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 Regulation 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 1 percent of the creditor’s net worth) 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 no 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, 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. However, dealers should comply with the FCRA requirements, as they
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
— information only a F&I manager will know.
Dealers can also make use of a “simplified notice,” which
must notify customers that they have 60 days to request the reasons for denial.
Since the simplified notice requires the issuer of 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 adverse action requirements.
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 in developing a roster of acceptable reasons for
denial.
In cases where the adverse action is based solely on reasons
cited by the lenders, the stated causes for denial reported by the dealer
should mirror those provided by the lenders. However, if a dealership employee
made the decision to deny the credit request, the basis for doing so should
ordinarily be limited to the reasons noted in the model agreements.
Because the ECOA is very specific as to what constitutes
discriminatory practices, care must be taken to ensure the decision was based
on the customer’s credit worthiness and not on any personal characteristics. If
the consumer requests the reasons for denial, the dealer may give those reasons
orally. However, the dealer must also confirm those reasons in writing if
requested within 60 days.
While the volume of dealer-generated adverse action notices
may be relatively high, one can anticipate a smaller number of consumer
requests for additional information when the simplified version is used. As
such, it should be possible to devote time to conduct a full review of the
facts, make a determination of the reason for denial, and subject this decision
to a second source for review before issuing the statement to the customer.
The ECOA does not offer any guidance as to how a notice
should be delivered, which means it can be delivered in person, by mail, by fax
or electronically. Please note that an electronic version can only be used if
the creditor complies with the Electronic Signatures in Global and National
Commerce (E-Sign) and the ECOA, and has obtained the customer’s permission to
receive the notice electronically.