“My FICO score is 810 and I received an adverse action notice. I’m not shopping there again!”

Few items in the mailbox raise the ire of prospective car buyers more than inappropriately sent adverse action notices. To avoid alienating customers, dealers should only send an adverse action notice when an adverse action occurs.

Federal regulators are very precise in their definition of adverse action. When a consumer applies for installment credit, an adverse action occurs when a creditor refuses to grant credit under any circumstance, or the creditor qualifies the request in substantially different amounts or for substantially different terms and the applicant does not agree to the qualification. In either instance, the creditor must issue an adverse action notice. The question now becomes, should the dealer also send a notice?

The dealer is the creditor at the time of sale, as the two parties to an installment sale contract are the customer (the debtor) and the seller (the creditor). Merchants are permitted to sell their merchandise on installments and, in doing so, assess a finance charge.

With the exception of buy-here, pay-here operators, dealers generally do not keep and collect their installment sale agreements. Most prefer to assign their installment sale agreements to funding sources willing to accept the contracts.

Keep in mind that installment sale transactions work to your benefit. The alternative would mean the actions taken by an F&I professional may be subject to the restrictions and disclosure requirements of a loan broker.

So if all the funding sources available to the selling dealer deny a prospective buyer’s request for credit, the dealer will not go forward with the transaction. No sale is made, assuming the dealer and buyer have not yet signed the installment sale agreement or, if signed, it contains an unwind or spot delivery provision.

The weight accorded the dealer’s role in the credit decision is grist for the lawyer’s mill, and the lack of conformity within the federal court districts on this subject doesn’t help. The National Automobile Dealers Association (NADA) issued guidance in this area in 2007. Erring on the side of caution, the organization recommended dealers issue the adverse action notices. Here at the Association of Finance & Insurance Professionals (AFIP), the requirement is integrated into our certification curriculum.

The selling dealer’s adverse action obligations fall into two categories: times when the notices are required and times when the notices are optional. The selling dealer has the option to issue a notice when:

  • A creditor refuses to grant credit under any circumstances.
  • All the funding sources available to the dealer refuse to grant credit.
  • One or more creditors qualify the request in substantially different amounts or for substantially different terms and the applicant does not agree to any of the qualifications.

In these situations, it is strongly recommended dealers send customers an adverse action notice within 30 days of receipt of the credit application.

Some dealers mistakenly believe that sending an adverse action notice for every deal is a good precaution. Perhaps so, but it accords the dealer no extra regulatory compliance protection.

The selling dealer is required to issue a notice only when the dealer does not send the application to any potential funding source because the applicant does not meet any of their requirements.

Making credit decisions at the dealer level is fraught with peril. Do not terminate a credit-related transaction of your own volition without the prior approval of management. If the customer is still breathing, submit the completed credit app to RouteOne, Dealertrack, another portal or one more funding source.

In this case, it’s the funding source or sources who decline or qualify the requests for credit. However, if five funding sources decline to extend credit, and agreeable terms are accepted by one, the dealer does not send the notice. You are not required to send an adverse action notice when the application is considered by more than one creditor and at least one creditor approves it.

The adverse action notice contains a wealth of important and practical information, including the applicant’s credit score, the reasons for adverse action or instructions on how to get the reasons, and instructions on how to obtain a copy of the credit report and challenge inaccurate entries. All is useful information to consumers in need of guidance, and all is a source of angst when received by creditworthy customers who simply failed to consummate a sale.

David Robertson is executive director of the Association of Finance & Insurance Professionals (AFIP). Email him at [email protected]