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Tackling Adverse Action Notices

March 2009, F&I and Showroom - Feature

by James S. Ganther, Esq. - Also by this author

There’s no doubt about the importance of compliance under today’s economic environment, as both regulators and financial institutions look to correct the missteps of recent years. This situation puts an extra emphasis on the one requirement that continues to raise questions among dealers — adverse action notices.

Both the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA) require dealerships to provide adverse action notices to their customers under certain circumstances. Adverse action requiring such a notice means the denial of a request for credit relative to the dollar amounts, annual percentage rate (APR), and terms contained in the verbal or written application. There are three conditions under which the ECOA requires the issuing of an adverse action notice:

■ Based on the information provided in a credit application, whether received in person or by telephone, a dealer cannot find a lending source willing to accept assignment of the installment sale agreement.

■ A vehicle is spot delivered and no funding source will accept the original terms of the deal, unless the dealer, customer, and lending source agree to different terms.

■ The deal is based on specific credit terms (a 72-month repayment period) and the customer rejects a counteroffer (a 60-month repayment period).

An adverse action notice is not required if the finance company accepts the terms of the credit under the conditions agreed to by the customer. Also, an adverse action notice is not required in cases where a counteroffer is made — representing terms and conditions that differ from the original deal — and the customer accepts the counteroffer.

As for the FCRA, there are two conditions under which an adverse action notice must be issued:

■ The information used in a credit report is the basis for denying the customer’s credit.

■ The information provided by a party other than a credit reporting agency, such as an employer or landlord, is the basis for denying credit.

In such cases, additional notification information required by the FCRA must be provided to the customer. It is permissible to combine the notice information mandated by the ECOA and the FCRA in one form.

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