Watch Out for Adverse Action Gaps

Any time a deal is unwound or modified, an adverse action notice must be provided by the dealership

Last month, we discussed processes for delivering adverse action notices required by both the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA). This month, I want to touch on a few points for emphasis and clarity.

A finance company that has denied credit to a customer will generally send the required adverse action notice. Exceptions exist, however, which is why a dealership must have its own adverse action policy.

Adverse action notification gaps can occur in two scenarios:

  1. When a customer’s credit request is denied by the dealership with no involvement from a finance company.
  2. Where a structured and agreed-upon deal is modified or rescinded.

Being aware of these gaps—and creating a policy to cover them—can save your dealership headaches and expense.

Gap scenario #1

In cases where no finance company denied credit, the customer submitted an application, then the dealership ran a bureau. Based on the bureau, the dealership determined that no finance company would fund a deal.

Therefore, the application was not sent to any finance source, and the dealer told the customer he or she did not qualify for credit.

Under this scenario, the burden lies solely with the dealership to provide an adverse action notice. The U.S. Court of Appeals for the Seventh Circuit ruled as such in Treadway v. Gateway Chevrolet Oldsmobile.

In the case, Tonja Treadway went to the dealership to purchase a vehicle. After running her credit—and without submitting her application to a finance company—Gateway advised her she would not qualify, but indicated the dealership could get her financing if she had a cosigner.

In the suit brought by Treadway, which claimed the dealership violated the ECOA when it failed to give her an adverse action notice, the appellate court held that the dealership was subject to the ECOA’s adverse action notice requirement.

Gap scenario #2

A gap may also occur when a deal has to be modified or rescinded, which can happen when a vehicle is spot-delivered. Consumer protection groups hate spot delivery. They incorrectly consider spot delivery a scheme to put customers in a new car, let them take it home, show it off, and then bring them back to the dealership to coerce different financing terms more favorable to the dealer.

Does this happen? Sure it does, but on a very limited basis, and at the kinds of dealerships that don’t read compliance articles.

For the majority of dealerships, there’s nothing wrong with spot delivery, and most customers appreciate the convenience of driving away in their new vehicle before the finance source has accepted assignment of the retail installment contract (RIC).

“Stuff happens,” as they say, and now and then a customer is called back because a legitimate issue occurs where the finance company requires stipulations, different terms, or simply will not proceed with the deal.

These situations are unfortunate, but because they do happen, your dealership should have a documented spot-delivery policy in place to handle situations where a deal must be unwound. But that’s a conversation for a different day.

When it becomes necessary to unwind the deal altogether, or renegotiate terms that are not as friendly to the customer as the prior arrangement, emotions run high. What you cannot do, however, is forget to provide the customer with the dealership’s adverse action notice.

In Tyson v. Sterling Rental Inc. dba Car Source, SeTaraTyson signed an RIC and took possession of the vehicle. Two days later, the dealership asked her to return, at which time it advised her the contract must be modified.

Tyson declined to sign a new agreement, and ultimately left the vehicle with the dealership. No adverse action notice was delivered by the dealer.

Finding for Tyson’s ECOA claim, the U.S. Court of Appeals for the Sixth Circuit noted that the proposed modifications to the original contract constituted an adverse action under the ECOA. This triggered the dealership’s obligation to provide a written statement of its specific reasons in an adverse action notice.

Your game plan

The best way to cover situations that may expose your dealership to liability and expense is to have a documented policy to ensure that adverse action notices are always delivered when:

  • Credit is denied;
  • Credit is revoked;
  • The terms of an existing credit arrangement are changed; or
  • Credit is refused in substantially the amount or on substantially the terms requested.

Any time a deal is unwound or modified, an adverse action notice must be provided by the dealership. Make it a policy to deliver the notice whenever a deal is unwound, and make sure all personnel understand and follow it.

Remember that the obligation to provide an adverse action notice under the ECOA is not dependent on whether a credit bureau and score are obtained, but rather on any adverse action (as defined by the court decisions) being taken.

David R. Missimer,, is general counsel for Automotive Compliance Consultants Inc. He spent 28 years in private practice as a litigator representing lenders, auto dealers, and numerous other entities and individuals. He has worked with dealership compliance issues since 2003 as co-founder of Automotive Compliance Consultants. He is a member of the National Association of Dealer Counsel, American Financial Services Association, and National Automotive Finance Association.

David R. Missimer


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