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.
Adverse Action at the Dealership
Let’s take a look at two examples of how the regulatory requirements apply to real-life situations.
Situation 1: Upon receipt of a credit application and credit bureau report, it is learned that the customer’s BEACON score of 325 is below the published thresholds of all lenders available to the dealer.
Requirement: In this case, a decision is made in-house not to submit the application and the parameters of the deal to any lending sources. The decision to deny the credit is made by someone at the dealership. An adverse action notice containing the ECOA and the FCRA information is required.
Situation 2: Upon receipt of a credit application and credit bureau report, it is apparent that the original parameters of the deal must be altered to find a willing funding source. The deal is renegotiated before the new agreed-to terms are submitted to a lending source.
Requirement: If the request for credit under the renegotiated deal is denied, the dealer must issue an adverse action notice containing the ECOA and the FCRA information.
Adverse action notices must be issued if the dealer can’t find a lending source willing to accept the credit terms posted to the original deal. Additionally, if the deal is based on the customer’s request for a specific APR, down payment, repayment term, and other relevant factors — and the request for credit under the parameters of the agreed-to deal is denied — an adverse action notice must be issued.
For example, in negotiating the deal, a customer will only accept the dealer-arranged funding if an APR of 5 percent can be secured. If a lender balks at the original deal at the requested APR, but says it will accept the deal at an APR higher than the customer is willing to accept, then an adverse action notice must be issued. This standard applies regardless of whether the decision to deny the credit was made by a dealership employee or a lending source.
If, in the situations previously described, a counteroffer was made to establish conditions acceptable to the customer, the lender and the dealer, then no adverse action notice is required. A notice would be required if the customer rejected the terms of the counteroffer.
Let’s say a credit application is shopped with two or more lending sources, as is generally the case. Here are three scenarios where an adverse action notice is required:
Scenario 1: A request for credit is sent to three sources. Two deny the request, but one will accept it on terms unacceptable to the selling dealer. The dealer elects not to do the deal, in effect denying the credit. Since the dealer decided not to offer credit, the dealer is responsible for issuing an adverse action notice. (It is likely that the two credit sources who denied the credit would send notices as well.)
Scenario 2: A request for credit is sent to three sources, and all three decline the request for credit. While all three of the lending institutions should issue notices, the dealer cannot rely on their notices to meet the dealer’s obligation. That’s why a dealer should also issue an adverse action notice. (There is no prohibition against issuing duplicate notices.)
Scenario 3: A request for credit is sent to three sources. Two decline the request and one accepts the request based on the terms agreed to by the customer. Since the creditor accepted the terms agreed to by the customer (and the transaction is consummated), the dealer is not required to issue an adverse action notice. The creditors denying the credit would probably issue notices, as they would not know the consumer received financing from another lending source.
It’s difficult to know what the future holds for the automotive industry. The one thing the industry can count on is the role compliance will play going forward. Stay tuned for the second part of the magazine’s coverage of adverse actions, which will appear in the April issue of F&I Management and Technology magazine.
James Ganther is the co-founder and president of Mosaic Interactive LLC, developer of Web-based legal compliance programs for automotive, RV and powersports dealers. He can be reached at [email protected].