As noted, both the FCRA and ECOA require creditors to give consumers notices if they take adverse action in response to credit applications. Adverse action essentially means a refusal to grant credit in substantially the amount or on substantially the terms requested by the consumer, unless the consumer accepts a counteroffer of credit. Adverse action also means terminating an account or changing its terms in a manner unfavorable to the consumer. “Creditors” are required to send adverse action notices. Auto dealers are creditors in vehicle financing transactions because they are involved in negotiating the credit terms such as by rehashing with financing sources, negotiating with the customer and marking up “buy rates.” They are also typically named as the creditor on the RISC, which they later sell to a financial institution. As creditors, dealers must give adverse action notices to consumers in three situations:
- When a dealer takes a credit application but does not send it to any financing source, typically because the consumer is credit-challenged;
- When a dealer unwinds or re-contracts a spot delivery deal; and
- When the dealer is unable to get the customer financed on terms acceptable to the dealer.
So if a dealer cannot get the customer financed either because no financing source offers credit terms acceptable to the dealership or because the customer declines the dealer\’s final offer of credit after concluding negotiations, the dealer must send the customer an adverse action notice.
Generally, a single form can be used for all adverse action notices. Additional language is required if the dealer’s decision was based in whole or in part on information received directly from a third party that is not a consumer reporting agency. An adverse action notice must inform the consumer of the adverse action; either give two to four reasons for the adverse action or tell the consumer whom they can call at the dealership within 60 days to get the reasons; identify any consumer reporting agency that provided a credit report or credit score used by the dealer; effective July 21, 2011, provide the consumer’s credit score and information about the credit score and the national distribution of credit score ranges under the credit scoring model in a manner similar to the credit score disclosure notice required under the Risk-based Pricing Rule discussed below; and contain other mandatory language. Since most banks and financial institutions give specific reasons for adverse action in their notices, dealers may want to use the option that permits them to tell consumers they can call for the reasons. If a consumer does call, the dealership should disclose two to four reasons for the adverse action as recorded in the deal jacket. If the dealer uses credit information obtained from someone other than a consumer reporting agency, the adverse action notice must so inform the consumer and give them the right to learn the nature of that information if they make a request in writing within 60 days. An example would be information received directly from the consumer’s employer, landlord or directly from a private creditor.
The Risk-based Pricing Rule took effect January 1, 2011. Its purpose is to let consumers know that they received worse credit terms than other consumers because of information in their credit reports. A creditor who uses a consumer report and provides credit to the consumer on “material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that person” either has to give these customers a “risk- based pricing notice” or give an exception “credit score disclosure notice” to all credit applicants. “Material terms” means the APR. For auto dealers, the credit score disclosure notice will likely be the easiest way to comply. To do so, you must give to each consumer who applies for credit (including both joint applicants) a notice containing their credit score; the date and identity of the person providing the credit score; the national distribution of credit scores among consumers under that credit scoring model disclosed in either a bar chart form or in language indicating where the customer falls in the national range of credit scores; and certain language disclosures about credit scores in general. You should give the notice as soon as possible after obtaining the customer’s credit score but at or before consummation of the transaction. If you use multiple credit scores, you must disclose the one you most relied on. You don’t need to give a credit score disclosure notice to consumers who apply for specific credit terms and receive exactly those terms.