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 Reg. 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 one percent of the creditor’s net worth, whichever is less) 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 nor 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 sustained by the consumer, 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. Regardless of the divide, it is recommended dealers comply with the FCRA requirements, as a dealership 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. This is information an F&I manager will provide.
Dealers can also make use of a “simplified notice.” It should contain language notifying the customer of his or her right to receive a statement if the request is made within 60 days of the notice.
Since the simplified notice requires that the individual issuing 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 the requirements set forth by the ECOA and the FCRA.
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 (and the simplified adverse action notice derived from these 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 action 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 after receiving a written adverse action notice, the dealer may give those reasons orally. However, the dealer must confirm those reasons in writing if the consumer makes the request 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 of the notice 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, prior to transmitting the notice, the customer’s permission to receive the notice electronically.
Content of the FCRA Notice
The FCRA portion of the adverse action notice has two parts. First, it must identify and provide contact information for the credit reporting agency which provided the credit report. The agency’s mailing address and toll-free telephone number must also be included. Adding the Website address is also recommended, as many consumers find it easier to request a file disclosure online.
Second, the FCRA requires that adverse action notices include these specific disclosures:
• That the credit decision was based wholly or in part on the information contained in the report issued by the credit reporting agency.
• A statement that the credit reporting agency did not make the credit decision and is unable to provide the consumer with the specific reasons for the actions taken.
• A statement that the customer has a right to obtain a free copy of his or her credit report from the credit reporting agency if a request is made within 60 days of receiving the notice.
• A statement that the customer has the right to question the accuracy or completeness of the information in his or her credit report.
If a credit decision was made wholly or in part on information obtained by a third party, this fact must also be stated. Third-party information may include assessments of the customer’s credit worthiness, credit standing, credit capacity, character, and more.
In addition, a statement must be included that the customer may, within 60 days of receipt of the notice, make a written request for the disclosure of the nature of this information. The creditor must respond in writing within 30 days of receipt of the request.
Procedures should also be established for addressing an incomplete credit application, as the issuance of a notice may depend on whether an application was submitted. The dealer may, within 30 days of receipt of an incomplete application, issue either an adverse action notice or a “notice of incompleteness.” If the dealer uses a notice of incompleteness, it must request in writing the required additional information, and must provide a reasonable timeframe for the customer to respond. It must also state that the request for credit will not be considered until the missing information is provided.
Timely Notices and Recordkeeping
As for timing, an adverse action notice must be sent within 30 days of receiving the application if the dealer cannot arrange for the requested financing. If a counteroffer is deemed unacceptable by the customer, the notice must be sent to the customer 90 days after delivering the counteroffer.
In the case of incomplete applications — and no notice of incompleteness is sent — the adverse action notice must be sent to the customer within 30 days of receipt of the incomplete application.
There are also rules governing how long a customer’s personal information must be stored after an adverse action notice is issued. The ECOA requires a customer’s information be kept on file for 25 months after a customer is notified of a credit approval, adverse action, or application incompleteness.
The retention period generally starts around the time the purchase-related activity occurs. However, in the case of a missing information request, the period may start well after the initial contact with the customer.
Additionally, if a dealership is under investigation or subject to an enforcement proceeding related to the ECOA or Regulation B, it must retain all customer records until the matter is resolved or the court grants permission for disposal.
The record retention obligation also applies to credit applications that are withdrawn. Credit approvals also fall under the retention mandate, even when the consumer did not complete the transaction.
The FCRA does not impose record retention requirements. However, it is suggested that these records also be maintained since the FCRA allows claims to be filed five years after the date of an alleged violation.
With today’s credit crisis, understanding the rules and regulations governing adverse action notices is crucial. Just remember to check with competent legal counsel to make sure your compliance processes aren’t met with any adverse actions.
Jim Ganther is the
co-founder and president of Mosaic Interactive LLC, a provider of Web-based
compliance programs. He can be reached at [email protected]. To read part 1 of the adverse action notices series, click here.