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Limiting Liability Under Adverse Action Notice Requirements

October 2005
Lawrence Byrne


Federal courts have been issuing rulings expanding on the necessity of car dealers to provide notice of adverse action under the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA). Dealers should take steps to limit their exposure under these acts.

With recent cases in mind, it is important that dealers address issues concerning the adverse action notification at the outset. First, it should be made clear to employees and included in the employee manual that only a finance manager may provide an opinion to a customer regarding financing or credit.

As the Treadway* decision outlined, even very casual communication with a consumer about credit could create exposure for a dealer.

Another safe practice is to have the consumer sign a disclosure advising the customer that if he wishes to be advised of the reasons of any adverse action, he should notify the dealer in writing. The disclosure should also note that the consumer was advised of the reason for the adverse action. Section 202.9 of the ECOA provides that an adverse action notice is required when adverse action is taken, and that the notice must contain certain information, such as the name and address of the creditor and statement of action taken. In addition, the notification must contain either a statement of specific reasons for the action taken, or a "disclosure of the applicant’s right to a statement of specific reasons within 30 days, if the statement is requested within 60 days of the creditor’s notification."  Disclosing the applicant’s rights at the outset will shift the burden on the consumer to ask in writing for a statement of reasons. This disclosure form should comply with the requirements of both the ECOA and FCRA.

The ECOA portion of the notice should include the following language:

The federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The federal agency that administers compliance with this law concerning this creditor is The Federal Trade Commission, Equal Credit Opportunity, Washington, DC 20580.

The ECOA portion should also include:

  • A statement that the consumer has the right to a written list of reasons for the denial of the credit application if requested in writing within 60 days; and
  • The name, address and contact number for the person at the dealership who is to handle the request
  • The FCRA portion of the disclosure form should include the following:
  • The name, address and toll free number of the consumer reporting agency
  • A statement that the credit reporting agency did not participate in the decision
  • A statement regarding the consumer’s right to a free report; and
  • A statement that the consumer has the right to dispute inaccurate information

Finally, it is recommended that an arbitration provision state that the parties agree to arbitrate any claims for failure to comply with the FCRA or the ECOA. Although arbitration provisions are not a compliance panacea, plaintiff attorneys generally disfavor arbitration as it limits their fees in fee shifting litigation.

If the customer does request reasons for an adverse action, the dealer should use the model notification form provided by the Federal Reserve Board (FRB) (available at http://www.dealercounsel.com/adverseaction). This form is straightforward, and allows the finance manager to check boxes that most resemble the reasons the creditor provided in its fax declination letter. Use of the notification form provided by the government is a simple way to avoid litigation concerning the form’s sufficiency. It is unlikely that a court will find the FRB format unacceptable.

Dealers should also take measures to avoid pointing out that they are involved in the credit decision in any way. There are additional liabilities under the FCRA for denying a consumer financing based upon a credit report, and a dealer may often be able to obtain summary judgment in this situation as the plaintiff does not have any evidence on whether the adverse action was based in whole or in part upon the credit report.

Many dealers are unaware of their legal exposure regarding the ECOA and the FCRA. Taking the steps outlined above is a relatively simple way to minimize liability.

*Treadway v. Gateway Chevrolet Oldsmobile, 362 F.3d 971 (7th Cir. 2004)

Larry Byrne is a partner in the firm's Litigation and Dispute Resolution Practice Group and he can be reached at 312 261 2155.  He represents automobile dealers in the Chicago metropolitan area focusing on litigation related to consumer fraud and related claims as well as implementing compliance proceures to avoid liabiilty.

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