The Calculus of Adverse Action
January 2007, F&I and Showroom - Feature
by Michael Benoit
You’ll notice that, from time
to time, I’ll devote a column to those pesky adverse action notice requirements.
For those of you who may be thinking that I do this because it’s all the law I know,
let me assure you that I have other talents as well. This just happens to be
one area of compliance I see as important and evolving, and one that I am more
and more convinced is not well understood by the dealer community. Dealers would
be well served to address in their rigorous (and enterprise-wide) compliance
programs their adverse action notice obligations and policies and procedures to
mitigate risk.
Spot deliveries gone awry
pose a specific adverse action issue for dealers, particularly where nonprime
customers are involved. Take the case of Thelma Robertson from Virginia. After seeing a
commercial for a well-known lead-generating company on television, she called
the lead generator and completed a loan application over the phone. Within 10
minutes of speaking to the representative, Thelma received a call back
instructing her to go to her local dealership to buy a car with her approved loan.
At the dealership, Thelma executed a retail installment sale contract and drove
off in her (new) used car.
A month later, Thelma
contacted the dealership to check on the status of her permanent tags. She was
told that her contract had been denied and that the dealer had to repossess the
car. As you might imagine, Thelma was a bit miffed. She sued the dealer,
alleging, among other claims, that the dealership violated the Equal Credit
Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA) when it failed
to provide her with an adverse action notice. The dealer moved to dismiss her
claims, primarily on the grounds that it was not a “creditor” in the
transaction, and therefore was not required to give an adverse action notice.
The U.S. District Court’s
Western District of Virginia denied the dealer’s motion to dismiss. Citing the
ECOA, it noted that a “creditor” includes “any person who … regularly arranges
for the extension, renewal or continuation of credit …”The court found that
Thelma pleaded facts sufficient to support her claim that the dealer acted as
the creditor (presumably by working with finance sources to arrange financing),
had taken adverse action against her and failed in its obligation to provide
her with an adverse action notice required under the ECOA.
The court also found that
Thelma had pleaded facts sufficient to support her claim that the dealer took
adverse action against her based on either “information contained in consumer
reports” or “information obtained from third parties other than consumer
reporting agencies (the standard for adverse action under the FCRA),”and that
the dealer failed to notify her of the adverse action altogether or failed to
notify her properly as required under the FCRA.
For both ECOA and FCRA
purposes, “adverse action” means “a denial or revocation of credit, a change in
the terms of an existing credit arrangement, or a refusal to grant credit in
substantially the amount or on substantially the terms requested.” I expect the
dealer will be able to prove facts that allow it to overcome Thelma’s adverse
action challenge under the ECOA, but not because the dealer isn’t a creditor or
because the adverse action didn’t occur. The dealer’s best defense will be to
show that the third-party finance company involved in the transaction provided adequate
notice.
Dealers routinely rely on
third-party finance sources to provide adverse action notices when credit is
denied. As we’ve noted before, the ECOA expressly allows dealers to do so. But
dealers need to remember that doing so does not relieve the dealer of liability
for the notice obligation. In other words, you better hope the third-party finance
company you rely on to send out adverse action notices gets it right.
Thelma’s FCRA allegation is
more troubling. The court could find that the act of taking the car back was
the adverse action — an action solely in the control of the dealer. Remember,
in a retail installment sales transaction, the contract is between the dealer
and the buyer (the finance source merely steps into the dealer’s shoes when the
contract is assigned). In Thelma’s case, the dealer will not be able to point
to the finance source as the entity responsible for repossessing the car
because the contract was never assigned (and the dealer admits that it took the
car).
Don’t be too cavalier
regarding your obligations to send adverse action notices. A good internal
compliance program can help you organize your business to limit the number of
notices you need to send and, more importantly, identify those times when you
do. Put yourselves in the shoes of Thelma’s dealer — would you rather spend 39 cents
on a stamp or $39,000 (or more) contributing to your lawyers’ disposable income
fund?
You do the math.
Michael Benoit is a
partner in the Washington, D.C., office of Hudson Cook LLP. He is a frequent speaker and
writer on a variety of consumer credit topics. He can be reached at michael.benoit@bobit.com. Nothing in this article is intended to be legal
advice and should not be taken as such. All legal questions should be addressed
to competent counsel.