New Adverse Action Notices Required Beginning July 21

The Dodd-Frank Act amends the Fair Credit Reporting Act (FCRA) to require that creditors (including dealers) disclose additional information on adverse action notices. The new law requires that adverse action notices include the following additional information beginning July 21, 2011:

(1) the credit score used in making the credit decision;
(2) the range of possible scores under the credit score model that was used;
(3) up to four key factors that adversely affected the consumer’s credit score (or up to five factors if the number of inquiries made with respect to that consumer report is a key factor);
(4) the date on which the credit score was created; and
(5) the name of the person or entity that provided the credit score.

The National Automobile Dealers Association (NADA) revised their publication titled “A Dealer Guide to Adverse Action Notices” (“the Guide”) to address these new requirements. NADA’s detailed guide provides much needed instructions for dealers in an area of compliance that has been riddled with confusing and contradictory information. It is important to understand, however, that the Guide recommends dealers send out notices in many more instances than what many dealers think is necessary. Specifically, the Guide recommends that dealers issue adverse action notices even in circumstances where an application was submitted to one or more finance companies and those companies issued their own notices.

Auto Advisory Services’ official position on this subject is consistent with the Guide’s instruction. But, not all attorneys agree that notices must be sent out under all the scenarios outlined in the Guide. It is for these reasons we recommend reviewing the Guide in its entirety and consulting with knowledgeable counsel prior to implementing any change in adverse action policies. Copies of the Guide have been distributed free of charge to all NADA members. Nonmembers may purchase copies of the guide for $20 by going to and clicking on “Resource Toolbox” (enrollment required).

What is adverse action?

Under the Equal Credit Opportunity Act (ECOA), adverse action is defined as “a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested.” (15 USC § 1691(d)(6)). The Fair Credit Reporting Act (FCRA) incorporates the same definition as in the ECOA, and then adds a “catch-all” definition that includes “any action taken or determination that is … adverse to the interests of the consumer.” (15 USC § 1681a(k))

Both the ECOA and the FCRA require adverse action notices. However, the FCRA requires the notice only when either a credit report or information from another third party source is used to make a credit determination. One form can be used to satisfy both notice requirements.

Under what circumstances do we have to give adverse action notices?

Until the release of the Guide, many industry experts (and even a couple of federal courts) were of the opinion that so long as the dealer “pre-checked” every application and offloaded all credit determinations to banks or finance companies, the dealer did not have to issue adverse action notices. NADA retained counsel to thoroughly research this issue, met with federal regulators, and ultimately concluded it is a better business practice to issue notices even in those cases where all applications are being submitted to finance companies for review. Therefore, pursuant to the Guide, dealers should be issuing notices quite often.

Specifically, notices should be issued when:

1. The dealer makes a negative credit determination on the spot.

Scenario 1: Consumer fills out a credit application and in the section asking for a phone number, the consumer writes “none.” The salesperson shows the application to the desk manager who says “no phone, no loan.” No credit report was run. The salesperson conveys this to the consumer and the consumer starts to leave. The dealer should either hand the consumer a copy of the Notice of Credit Denial (“adverse action notice”) or mail a copy to the consumer’s address shown on the credit application.

2. The dealer pre-checks an application and no finance company approves the deal.

Scenario 2: Salesperson takes a credit application from the consumer. The desk manager runs a credit report and immediately notices a low credit score and a recent repossession. The desk manager refuses to authorize a spot delivery but refers the consumer to the special finance department. The special finance manager then explains to the consumer that he will contact a couple of different finance companies and call the consumer if he is able to get an approval. The consumer leaves. The special finance manager is unable to find anyone willing to approve the application. The dealer should mail a copy of the Notice of Credit Denial to the consumer’s address shown on the credit application.

3. Financing is determined to be unavailable after delivery.

Scenario 3: Customer takes delivery of a vehicle. Dealer is unable to find a finance source willing to buy the paper. Dealer sends a Notice of Election to Cancel (“10-day letter”) to customer, demanding return of the vehicle. Dealer should issue a Notice of Credit Denial along with the 10-day letter.

4. A consumer applies for specific credit/lease terms but does not qualify for those terms and does not accept a counteroffer.

Scenario 4: Consumer sees a television ad promoting a national 0% interest program from GM. Consumer visits the dealer, picks out a car and mentions to the salesperson that he is interested in 0% financing. The salesperson takes a credit application from the consumer, the desk runs a credit report and determines the customer does not qualify for the 0% program. The desk then offers financing at 10.5%. The customer is not interested in anything other than the 0% financing and starts to walk out. The dealer should either hand the consumer a copy of the Notice of Credit Denial or mail a copy to the consumer’s address shown on the credit application.

The above should represent the majority of scenarios where a Notice of Credit Denial is required.  Nevertheless, there could be other scenarios.  This is why it is important to seek counsel in this area.