F&I Compliance Tip: Adverse Action Notices

An “adverse action” is, basically, a refusal to grant credit, the termination of an account, or the changing of an account’s terms in a manner unfavorable to the consumer — such as unwinding a spot delivery contract.

Why it Matters

As creditors, dealers are required to give adverse action notices to consumers in three situations:

  1. When a dealer takes a credit application but does not send it to any financing source, typically because the consumer is credit-challenged.
  2. When a dealer unwinds or re-contracts a spot delivery deal.
  3. When the dealer is unable to get the customer financed on terms acceptable to the dealer, or because the customer declines the dealer’s final offer of credit after concluding negotiations.

Auto dealers are viewed as creditors because they are involved in negotiating the credit terms, and are typically named as the creditor on the retail installment sale contract (RISC) – which is later sold to a financial institution. A lender’s adverse action notice does not contain the necessary disclosures that must be given by the dealer. That includes, but is not limited to, naming the credit bureaus used by the dealer and the federal agency that administers compliance.

How it Works

An adverse action notice must do the following:

  1. Inform the consumer of the adverse action either with two to four reasons, or by notifying the consumer who to call at the dealership within 60 days to get the reasons.
  2. Identify any consumer reporting agency that provided a credit report or credit score.
  3. Provide the consumer’s credit score, information about the credit score, and up to four to five “key factors” that adversely affect the credit score (four key factors unless one is the number of recent credit inquiries).

The notice must contain other mandatory language as well. To view a sample notice and get more detail about adverse action notices and more compliance advice, download the free 2024 Dealertrack Compliance Guide.

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