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What’s a Dealer to do about Adverse Action Notices?

September 2006, F&I and Showroom - Feature

by Charles “Chuck” Geitner, Esq. - Also by this author

Adverse action notification under the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA) just became more confusing as a result of a recent opinion from the Federal District Court in the Eastern District of Virginia. If your dealership has not been sending adverse action notices and you are wondering whether your dealership should institute procedures for doing so or, are wondering what an adverse action is, then this article may help.

Two federal acts deal with a creditor’s obligation to furnish certain information to a customer seeking financing whenever a decision is made that is adverse to the customer. The purpose of the first act, the Equal Credit Opportunity Act (ECOA), is to prohibit creditors from discriminating against any credit applicant “with respect to any aspect of a credit transaction ... on the basis of race, color, religion, national origin, sex or marital status.” Among its other goals, ECOA was enacted to eradicate credit discrimination, especially credit discrimination waged against married women whom creditors traditionally refused to consider for individual credit.

In the second act, the Fair Credit Reporting Act (FCRA), Congress’s main goal was to ensure that credit reporting agencies exercised their “credit reporting responsibilities with fairness, impartiality, and respect to the consumer’s right to privacy.” FCRA was enacted to correct abuses which Congress perceived within the consumer credit reporting industry, and establishes a means for consumers to correct inaccuracies in their credit report.

Under both ECOA and FCRA, “creditors” are required to provide notice to consumers under certain circumstances when “adverse action” is taken with respect to the consumer’s application for credit or the customer’s interests. With limited exception, most courts consider dealerships to be creditors under both the ECOA and the FCRA. A “creditor” is defined as:

“any person who regularly extends, renews or continues credit; any person who regularly arranges for the extension, renewal or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.”

If your dealership enters into retail installment contracts with customers when selling motor vehicles, or even if it just arranges for the customer to obtain credit from financing source, the dealership will be considered a creditor under both acts.

The types of action which will trigger the obligation to send an adverse action notice is a trickier issue. Under ECOA, the term “adverse action” is defined as:

“A denial or revocation of credit … or a refusal to grant credit in substantially the amount or on substantially the terms requested.”

In contrast, under FCRA an adverse action is not just limited to a creditor’s denial or revocation of credit. Under FCRA the term “adverse action” is defined more broadly because it contains a catch-all provision in which an action is considered “adverse” if it is “adverse to the interests of the consumer.”

Not surprisingly, whether an action is “adverse” and thus triggers the notice requirement under ECOA and FCRA depends upon the facts of the case. Some courts have found adverse action when:

a) a dealership has repossessed the vehicle it sold based upon the failure of a finance company to qualify the customer for credit, Castro v. Union Nissan, Inc., 2002 WL 1466910 (N.D. Ill. 2002) as occasionally occurs when making a spot delivery.

b) a dealership decides not to submit a credit application to a finance company because it does not believe that the customer will qualify for financing, Treadway, supra.

c) a dealership raises the interest rate from the rate that was applied for by the customer, Padin v. Oyster Point Dodge, 397 F. Supp. 2d 712 (E.D. Va. 2005).

d) a dealership requires a customer to make an additional cash deposit toward the purchase price in order to obtain financing, Rayburn v. Car Credit Center Corp., 2000 WL 1508238 (N.D. Ill. 2000)

e) a dealership decides that the customer needs a co-signer in order to secure financing, Rodriguez v. Lynch Ford, Inc., 2004 WL 2958772 (N.D. Ill. 2004).

On the other hand, some courts have declined to find adverse action when:

a) a dealer secures financing on substantially the same credit terms with an alternate lending source, Madrigal v. Kline Oldsmobile, Inc., 423 F.3d 819 (8th Cir. 2005); Mayberry v. Ememessay, Inc., 201 F. Supp. 2d 687 (W.D. Va. 2002).

b) a dealer repossesses the vehicle it sold based solely on the customer’s failure to make a payment, Castro v. Union Nissan, Inc., 2002 WL 1466810 (N.D. Ill. 2002).

c) a dealer refuses to extend credit because it learns that the customer had falsified the income stated in the application, Mayberry v. Ememessay, Inc., 201 F. Supp. 2d 687 (W.D. Va. 2002).

d) a dealership provides a counter-offer to the credit terms sought, which the customer accepts, Harper v. Lindsay Chevrolet Oldsmobile, LLC, 212 F. Supp. 2d 582 (E.D. Vir. 2002).

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