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HOT TOPICS
2017
MEMBERSHIP
DIRECTORY
164
The Equal Credit Opportunity Act (“ECOA”) and the Federal Reserve Board’s Regulation B
ECOA and the Federal Reserve Board’s and Consumer Financial Protection Bureau’s Regulation B prohibit auto dealer
discrimination in granting or denying credit. While there has been some discussion as to whether ECOA applies
only to financing in connection with a vehicle purchase, the better view is to comply on both retail installment
financing as well as lease transactions, and that position has been adopted by most lenders. ECOA also mandates
the time frames (30 days after receipt of a completed credit application) for notifying the applicant of the credit
decision (e.g., offering credit, informing the consumer that additional information is necessary to make a credit
decision, making a counteroffer, or sending an adverse action notice). An ECOA adverse action notice must be in
writing and either provide specific reasons why the credit application was denied or counter-offered (additional
explanatory disclosures are required if the adverse action is based on a credit score), or tell the consumer how they
may contact the dealership within 60 days to get the reasons.
ECOA also requires that credit application forms contain certain disclosures, such as the consumer’s right to
not reveal income from alimony, child support, or separate maintenance if the consumer does not want such
income to be considered as a basis for repaying the credit obligation. Certain state laws impose additional notice
requirements in credit applications. Regulation B also requires that multiple consumer applicants affirmatively
state on the credit application whether or not they want to apply for joint credit.
Adverse Action Notice Obligations
Adverse action means a refusal to grant credit or a refusal to grant credit in substantially the amount or on
substantially the terms requested by the consumer, unless the consumer accepts a counteroffer of credit. Adverse
action also means terminating an account or changing its terms in a manner unfavorable to the consumer, except
for actions taken in connection with a default or delinquency on the account. An example is unwinding or re-
contracting a “spot delivery” contract on less favorable terms. Auto dealers are identified as the creditor/seller
on the retail installment sales contract (“RISC”), despite the fact they later sell the RISC to a finance source. As
creditors, dealers should give adverse action notices to consumers in at least three situations:
•
When a dealer takes a credit application but does not send it to any financing source, typically because the
consumer is credit-challenged;
•
When a dealer unwinds or re-contracts a spot delivery deal; and
•
When the dealer is unable to get the customer financed on terms acceptable to the dealer.
It is a common misunderstanding that a dealer can rely on a finance source’s adverse action notice. In fact, a
finance source’s adverse action notice will not shield the dealer from liability in these instances as it does not
contain the necessary disclosures that must be given by the dealer, including but not limited to naming the credit
bureaus used and the federal agency that administers compliance for dealers (i.e., the FTC). Furthermore, most
lenders advise dealers in their dealer agreement or their program materials that the lender’s issuance of any
adverse action notice is only on such lender’s behalf.