Adverse Action Notices
by: Chuck Lopez
The Adverse Action Notice is one area that can, and does, deliver
nightmares to dealerships caught unaware, or unprepared. An Adverse
Action Notice is a formal notification that creditors must send to
consumers who seek credit, but are denied credit on the terms
Dealers need to send this notice to the customer whenever:
Dealerships are unable to finance a spot delivery customer;
Dealerships make a subjective decision about a customer's credit
Dealerships decide that based on information contained in the
customer’s credit report, the dealership won’t forward the
application to third party companies.
Lenders generally are required to send these notices as a first-line
defense. But when a dealer spot delivers, the law sees him or her as a
creditor responsible for sending the letter. Dealers often do not know
this and it can get them into trouble.
The Governing Regulations
There are two major regulations that govern the Adverse Action Notice.
These are the Fair Credit Reporting Act (FCRA) and the Equal Credit
Opportunity Act (ECOA). These regulations mandate that creditors must
give consumers reasons and/or explanations for an adverse credit
An “adverse credit decision” is any credit decision
offered to a customer that is not exactly what was originally requested,
including an outright denial or a counter offer not accepted by the
As a guide, here are some requirements that outline which of these
regulatory acts govern a particular area with the issuing an Adverse
Circumstances that would fall under the ECOA for the issuing of
an Adverse Action Notice:
If the information provided on a credit application, not a credit
bureau report, is the reason that the dealership is unable to locate a
The customer negotiates a deal with specific terms, and the
dealership is unable to secure financing exactly as requested.
The dealership spot delivers a vehicle and the finance office
cannot secure a lending source, due to information provided on a credit
Circumstances that would fall under the FCRA for the issuing of an
Adverse Action Notice:
If information from a credit bureau report, not the credit
application, is the reason that the dealership is unable to locate a
lending source, ensure that the dealership retains the credit bureau
report in a secured file.
If information from third party sources, not a credit reporting
agency, is the reason a dealership is unable to locate a lending source,
this can include information provided by an employer, a landlord, or
another lending operation.
If the reasons for the Adverse Action Notice falls under the
mandates of the FCRA make sure you send the correct notice with the
additional requirements met as mandated by the FCRA.
Please note that it is OK to incorporate information required by the
FCRA and ECOA into one notice.
Specific Terms and Counter Offers
If a deal is based on a request by a consumer with specific terms, and
the dealership is not able to secure a lending source willing to offer
the loan based on the exact terms requested, you must issue an Adverse
Action Notice. These specific terms will generally include: specific
repayment terms; APR; down payment; date of first payment; etc.
If a lender presents a counter offer, and the consumer does not
accept it, then an Adverse Action Notice is required. However, if the
consumer does accept the terms of the counter offer, then no notice is
required. Regardless of who presents the counter offer, a lending
institution, or an employee of the dealership, the same mandate
Incomplete Credit Application
If a consumer provides an incomplete credit application, or it is
missing important information, which would prevent a proper review, then
the dealership has two options:
Send the consumer a timely Adverse Action Notice, or
Send the consumer a written Notice of Incompleteness. This notice
A: A reasonable, and stated, time allowed to respond;
B: The items that are needed to complete the application; and
C: A notice that the dealership cannot continue with a loan review
unless it receives the items needed within the stated timeframe.
Adverse Action Notifications
A compliant adverse-action notice must:
Be sent within 30 days of the adverse action;
Notify the customer that his or her credit application was not
Contain the creditor's (or dealer's) name, address, contact name,
and phone number;
Disclose the name, address, and phone number for all credit bureau
As with most regulatory mandates, there are various penalty sources to
consider. The ECOA and FCRA both assign penalties for violations, which
include punitive damages up to $10,000 in individual actions, and up to
$500,000 or 1 percent of the creditor’s net worth (whichever is
less) in class actions. Court costs and reasonable attorney fees may
also be assigned.
Chuck Lopez is the president of Trans Global Marketing and has
over 20 years experience in the retail auto and RV industry. His
experience ranges from being a sales person to F&I manager and
director, and general manager. If you have questions or comments,
or call (253) 847-5054.