There are three primary scenarios in which you should always send an adverse action notice
Use the term “adverse action notice” around a new salesperson at your dealership, and watch their eyes widen and eyebrows raise. For auto industry newbies, the term just sounds negative—regardless of the fact that they have no clue what it all means. Even for more seasoned employees, the laws surrounding adverse action notices can be slightly confusing.
Don’t let these notices throw you off your game. Once you understand what they are, why they’re necessary, and what your obligations are, you’ll feel much more confident during your next customer interaction.
What is an adverse action notice?
If you’re helping a customer secure credit to purchase a vehicle, an adverse action notice is a letter you must give them if any terms change in a way that is unfavorable to them. The entire purpose of this notice is to protect the consumer, so if anything in a credit decision isn’t working out in their favor, it likely requires the issuance of a letter.
Not sure whether you’re involved enough in financing to have to send an adverse action notice? If your dealership plays any role in credit decisions—setting the interest rate, determining the term length, or any other term of credit—then you’re considered a creditor under the Equal Credit Opportunity Act (ECOA). If you don’t participate in credit decisions at all and only refer applicants to creditors, you may be exempt.
Why financing falls through (and what your obligations are)
When you receive a credit application from a potential buyer, you’re probably going to run it right away to get the deal moving. However, you do have 30 days from receipt of an application to decide what the outcome will be. After that, you’d send an adverse action notice.
Why would a customer be denied or have financing fall through? These are the three top reasons you’d have to send an adverse action notice:
- You check the customer’s credit report and credit score, and it’s quite clear that they will never receive approval for financing. They may have an extremely low credit score, they’ve maxed out all of their available credit, their on-time payment history is spotty, or they have too many open accounts. If you decide to deny them without shopping their application around to lenders, then you assume responsibility as the sole creditor and denial of credit.
- Your customer doesn’t want a repayment term that’s longer than 48 months or an interest rate above 4 percent, but after talking to the lender, the best you can do is 5 percent for 60 months. You try to negotiate back and forth with the customer and lender, but in the end, your final offer has to be the 60-month deal. If the customer declines that offer, you will send an adverse action notice.
- You enter into a spot delivery agreement with the customer because you feel good about the financing going through, but ultimately, it does not. If you have to unwind the deal and change credit terms, an adverse action notice would be required.
If your customer accepts any credit offer and you’re able to seal the deal, an adverse action notice is not needed. And don’t count on the lender to send an adverse action notice—they have their own set of rules, and a notice from them does not eliminate any obligations your dealership has to the consumer.
Compliance and adverse action notices
Two federal laws govern adverse action notices —the ECOA and the Fair Credit Reporting Act (FCRA). The ECOA is meant to help consumers by providing transparency in the credit underwriting process and to protect them from discrimination. The FCRA is to let consumers know that negative information was the reason for the adverse action so they have an opportunity to correct the information if it is incorrect.
If you fail to send an adverse action notice, you can be sued privately under the ECOA and/or held liable by the Federal Trade Commission for failing to comply with the FCRA. Your dealership could be fined up to $10,000 per violation—and that’s excluding any potential rulings from private lawsuits.
How can you avoid these penalties? Follow the rules, and if there’s ever a time where you’re not sure if an adverse action notice is necessary, just send one anyway. Also, any documentation surrounding credit decisions—applications, credit reports, proof of sending an adverse action notice, reasons for denying credit—should be saved for five years from the date of the credit decision.
Stay organized, alert, and compliant and remember that although adverse action notices can be stressful, they play an essential role in protecting your customers.