The Federales have deputized dealers to provide certain disclosures to consumers. Like it or not, you have an obligation to tell most of your customers what their credit score is. In many cases, you must disclose the customer’s credit score on either an adverse action notice or on a credit score disclosure notice.
Each requirement is mandated by different federal laws. An adverse action notice can be required under either the Fair Credit Reporting Act (FCRA) or the Equal Credit Opportunity Act (ECOA). Each act provides a different trigger event to force the potential disclosure in the event an adverse action is taken.
Adverse action is defined as a refusal to grant credit in substantially the amount or on substantially the terms requested on a credit application. The trigger event under the FCRA is the pulling of a credit bureau report. Conversely, when you accept a credit app from a consumer, you trigger a potential adverse action notification to the consumer.
Although the law does not require a signature to pull a credit report, the creditor must be able to prove it had both consent and a permissible purpose to pull a consumer’s credit report. Most dealers require a signed credit application before pulling credit to have a defense if someone claims no permission was given to pull his or her credit.
As most dealers require a signed credit application before pulling credit, the trigger event for a potential adverse action notice becomes accepting a credit application under the ECOA. In “I’m-not-a-lawyer” terms, this essentially means if you accept a credit application and do not sell the consumer a vehicle, you should provide the consumer with an adverse action notice within 30 days of the adverse action.
There are two different processes for providing an adverse action notice. Both rely upon a certain level of technology to at least print the adverse action notice, as nobody completes an adverse action notice by hand.
Process No. 1: The Belt-and-Suspenders Approach
Some dealers have a policy to give the consumer an adverse action notice as soon as a credit bureau report is pulled. They are taking a belt-and-suspenders approach: They know they cannot be sued for not providing an adverse action notice. Some dealers also believe this process is the most cost-efficient approach as well as the least painless, requiring less thought by managers.
Those who disagree offer three arguments: First, it potentially introduces a negative thought into the rapport-building aspect of selling a vehicle and introduces an unnecessary objection to overcome. Second, some dealers interpret a law that requires that something be done in certain circumstances as meaning it is only done when those certain circumstances materialize. In other words, you should only provide an adverse action notice when an adverse action is taken.
Finally, the specter of a dealer’s agreement with the three credit reporting agencies comes into play. Just as the dealer-lender agreement defines your responsibilities when assigning retail installment contracts or lease agreements with your third-party finance sources, each dealer has signed an agreement with each of the credit reporting agencies.
The credit reporting agencies are required to provide a free credit report to any consumer who has received an adverse action notice. Credit reporting agencies, however, do not like providing anything for free, so a dealer who gives every consumer an adverse action notice is potentially increasing the agency’s cost. Rumor has it that one of the credit reporting agencies threatened to terminate its agreement with a dealership if it continued to provide adverse action notices to all consumers it pulled a credit report on.
Process No. 2: Target Non-Buyers Only
Other dealers take a more measured approach. They create a queue of consumers from whom they have accepted a credit application, filtered by date. An adverse action notice is sent if the consumers within a queue have not purchased a vehicle from the dealership within 15 days of the date of the credit application.
Some of these dealers manage the process internally, assigning a staff member to check the queue daily, confirm whether each customer purchased a vehicle, and to print and mail an adverse action to customers who didn’t. Other dealerships enlist the service of the vendor from whom they obtain the credit bureau report. Most of these vendors will also create a queue, confirm a vehicle was not sold, and print and mail an adverse action notice to the consumer. The cost for this service varies, so check with your credit bureau provider.
Dealers who use this approach believe it filters out those consumers who purchase a vehicle so they don’t receive an adverse action notice. This, they believe, satisfies the requirement to send an adverse action notice within 30 days of the adverse action. However, dealers who don’t subscribe to this approach feel that some consumers who were shopping two weeks ago may still be in the market. So, sending an adverse action notice at this point is like telling a consumer, “We can’t help you, so shop elsewhere.”
It is worth noting how these processes apply to unwinds. Many of the cases I have worked as an expert witness involved a spot delivery gone bad. A common claim against the dealer in these cases is the lack of an adverse action notice after the dealer repossessed the vehicle in the middle of the night.
Some dealers will send an adverse action notice by certified mail on unwinds. Others will print an adverse action notice, send it by regular mail, and document the file. Then there’s the dealer who simply worries about putting a “For Sale” sign on the vehicle. Whatever you decide, don’t be the latter.
The Right Approach
I started helping dealers with their compliance initiatives shortly after the first terrorist attack on the Twin Towers in New York City, the Pentagon in Washington, and a farm field in Pennsylvania. When the industry started its recovery and people were flying to other cities to start conducting business again, I started preaching that dealers were obligated to send adverse action notices. Nearly every recap meeting included this objection: “Our banks send that notice, so we don’t have to.”
Eventually (for the most part), our clients have come around to our position on the adverse action notices. And by now, most of them are sending adverse action notices. The variable is the approach they use.
Ultimately, once you realize you must have a process in place to provide an adverse action notice, it becomes a business decision on which approach you choose. Do you want to give an adverse action notice to every consumer who walks through your doors? Do you want to send it two weeks later to those consumers who probably bought elsewhere? Or are you willing to take the risk of a lawsuit claiming you failed to send an adverse action notice on a qualifying transaction?
It’s a business decision. Good luck and good selling.
Gil Van Over is the executive director of Automotive Compliance Education (ACE), the founder and president of gvo3 & Associates, and the author of “Automotive Compliance in a Digital World,” a new book that will be available at NADA 2018. Email him at [email protected].