November 2012, Auto Dealer Today - WebXclusive
A question often asked is whether a consumer may sue an auto dealership for its failure to provide an adverse action notice as required by the Fair Credit Reporting Act (FCRA). The answer and the question can be confusing, so I hope to clarify the issue here and clearly spell out the conditions under which auto dealers must provide an adverse action notice.
Concern arose in 2006 when a Virginia district court ignored overwhelming case evidence to the contrary and found that the ban on private causes of action in Section 1681 of the FCRA only applied to a limited subsection. As a result, consumers could sue for failure to receive an adverse action notice.
The overwhelming—and I do mean overwhelming—court decisions on the issue have held that a private individual cannot sue a creditor for failing to provide an adverse action notice under the FCRA. An exception only occurs if a user of a credit report is a named defendant in one of two particular courtrooms, one in Virginia and one in northern California.
So, the answer to the question, “Can my dealership be sued by a private individual for failing to provide an adverse action notice under the FCRA?” is no. This question and answer, however, are misguided. A dealership may still be held liable by the Federal Trade Commission (FTC) for failing to comply with the FCRA requirement to provide an adverse action notice. Despite exemption under the FCRA to private lawsuits, a dealer can be sued privately for failing to provide an adverse action notice under a different act. This other act, the Equal Credit Opportunity Act (ECOA), requires a creditor who takes adverse action on a consumer’s credit application to provide a “statement of reasons” for the action.
Adverse action notice is required when:
- Credit is denied;
- Credit is not even submitted for approval;
- Credit is not granted upon the terms requested; or
- The decision is based entirely or in part on information contained in a consumer report.
Therefore, according to the ECOA, any denial of credit, or a decision on behalf of the dealership not to even submit a credit application, will require an adverse action notice be forwarded.
What Dealers Must Know
Unlike the FCRA, the ECOA does provide consumers the right to bring a private cause of action when a creditor violates the terms of the act by failing to provide an adverse action notice.
Although the purpose of the ECOA is to prevent discrimination against those applying for credit, it also contains notice requirements providing that an applicant for credit against whom an adverse action is taken shall be entitled to a statement of the reasons for such an action from the creditor.
The law provides that a consumer may bring a civil action against any creditor who fails to comply with any requirement imposed under the ECOA, including failure to provide an adverse action notice. A claim against a creditor for failing to provide an adverse action notice may be brought even if the consumer does not allege any discrimination. In other words, the adverse action notice required under the ECOA is required in every credit transaction covered by the ECOA and is not contingent upon any claim of actual discrimination.
Regulations under the ECOA and case law define a creditor, for purposes of the Act, as any person who regularly extends, renews or continues credit, or any person who regularly arranges for the extension, renewal or continuation of credit. Regulations further define a creditor as “a person who, in the ordinary course of business, regularly participates in a credit decision, including the terms of credit.” The definition of creditor under the statute, as well as regulations, places most dealerships squarely under the term “creditor.”
One Key Exemption
Only in those situations where an automobile dealer does not participate in credit decisions and only accepts applications and refers the applicants to creditors may the dealership be exempt from providing an adverse action notice.
Any participation by the automobile dealership in the credit decision—whether by establishing the rate, setting any other term of the credit or benefiting financially by the issuance of credit—places a dealer under the heading of creditor as defined by the ECOA and various regulations. As a creditor under the ECOA, it is the responsibility of the automobile dealership to issue adverse action notices when required by the Act. Failure to issue an adverse action notice will not subject a dealership to a private cause of action under the FCRA, but will subject the dealership to a private cause of action under the ECOA.
This liability is not restricted to cases where no adverse action notice is sent by any entity involved in the credit transaction. There are cases in which a dealer has been found liable under the ECOA for failure to issue an adverse action notice despite the fact that the end lender issued an adverse action notice. Courts ruling on the subject have found the obligation is on each creditor to issue the adverse action notice. Therefore, adverse action notices issued by the third-party lender do not absolve a dealership from issuing its own adverse action notice.
Putting aside the exposure to liability from consumer suits, government agencies enforce both the FCRA and ECOA and can assess fines up to $10,000 per violation against entities failing to comply with either Act. For automobile dealerships, the FTC has the authority to enforce compliance with the FCRA and the ECOA.
The ECOA requires creditors to maintain paperwork in the form of:
- Credit applications;
- Credit reports;
- Documents verifying an adverse action notice was provided;
- The reasons for denying credit; and
- Any written statements submitted by a consumer alleging any violation of the ECOA.
These documents must be kept for a period of five years from the date the credit decision was made. Retention of these documents will make them available to defend any claim filed by a consumer. Required document retention also makes it simple for a government agency to audit your compliance with certain aspects of the FCRA and ECOA.
Given the current presidential administration’s push to clean up the consumer lending marketplace, now may be a very good time to assess your dealership’s compliance with the notice requirements of the FCRA and ECOA.
About the author: David R. Missimer is Vice vice President president and General general Counsel counsel for Automotive Compliance Consultants, Inc., the industry’s only dealership-centric compliance consulting, audit and training company.
Vol 9, Issue 9