An important change to dealer adverse action notices is coming on July 21, 2011.
As you know, dealers are required by the Equal Credit Opportunity Act and Fed Regulation B (ECOA) and the Fair Credit Reporting Act (FCRA) to send adverse action notices to their customers within 30 days of taking a credit application in three situations:
- When they take a credit application from the customer but do not send it to any financing source;
- When they unwind or recontract a spot delivery deal; and
- When they cannot get the customer financed either because they did not receive an acceptable credit offer from a lender or because the customer rejected the dealer’s final offer of credit terms.
Previously, adverse action notices needed to identify any credit bureau that provided a credit report the dealer used with respect to the consumer and inform the consumer that if they want to know the reasons for the adverse action they can call a named person at the dealership within 60 days.
Starting July 21, an adverse action notice will need to contain additional information about the consumer’s credit score if the credit score was used in the dealer’s credit decision. This requirement was added by the Dodd-Frank Act of 2010 and the July 21 compliance date is firm.
The information required for adverse action notices is similar to that required for Risk Based Pricing credit score disclosure exception notices that dealers must give to consumers for whom they use a credit report in evaluating the consumer’s credit. Specifically, the adverse action notice will need to contain the following information:
- The numerical credit score used in making the decision;
- The range of possible credit scores under the model used;
- The 4-5 key factors that adversely affected the credit score of the consumer in the model used (5 factors if one of the factors was number of recent credit inquiries);
- The date on which the credit score was created; and
- The name of the person or entity that provided the credit score.
New model form adverse action notices have been proposed by the FTC to meet the new requirements. DealerTrack will provide dealers with adverse action notices for individual consumers that meet the new requirements for dealers ____________________________.
Penalties for failing to issue an adverse action notice under the ECOA can include class action liability for actual and punitive damages of up to the lesser of $500,000 or 1% of the dealer’s net worth. In addition, under the FCRA, the FTC can bring a civil action for $3,500 in the event of a knowing violation. Each failure to give an adverse action notice would likely be considered a separate violation.
Randy Henrick is Associate General Counsel and lead Compliance Counsel for DealerTrack, Inc. He is also Chairman of the New York State Bar Association’s Consumer Financial Services Committee. This article is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person. Because of the generality of this update, the information provided in this article may not apply to all situations and should not be acted upon without specific legal advice based on your dealership’s particular situations from a knowledgeable attorney or compliance professional licensed to practice in your state.
thecomplianceguide.com is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the general nature of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations and circumstances.