Federal law prohibits discrimination in any aspect of a credit transaction. Under the Equal Credit Opportunity Act (ECOA), you cannot treat a credit applicant less favorably because of color, religion, national origin, sex, marital status, age, or because the applicant relies on social security, welfare, or other public assistance.
This law also requires you to give a notice, called an adverse action notice, under certain circumstances, such as denying a request for credit. A related law, the Fair Credit Reporting Act (FCRA), also may require you to give an adverse action notice (which may be combined with the ECOA notice) if a credit report or information from a third party other than a consumer reporting agency (CRA) is involved in an adverse credit decision.
You should adopt policies and procedures to ensure that you are: (1) sending out timely and proper notices as required by the ECOA and the FCRA, and (2) maintaining proper records. You should implement a policy that, at a minimum, includes the following:
- A requirement to notify customers who apply for credit about the action you take whether you accept, reject, make a counteroffer, or determine that the application is incomplete. Your policy should require that you give this notice within 30 days of receiving any credit application.
- Adopt adverse action notice procedures to ensure that you send adverse action notices when required. You should have a policy of sending notices whenever you are involved in making the credit decision or setting the terms of credit and adverse action is taken. If you send out simplified adverse action notices, designate a finance manager who is knowledgeable about adverse action law and trained in your dealership's adverse action notice procedures to respond to all customer requests for a specific statement of reasons.
- Adopt and implement record-retention policies. In particular, ensure you keep records stating, or otherwise record, the specific reason why you did not provide financing on the requested terms. Your record retention policy should also include procedures for disposing of records as required by other applicable laws and regulations that are not discussed in this guide.
- Adopt a formal practice of allocating responsibility for sending out adverse action notices. For example, consider including a statement in the dealer/finance source agreements stating that the finance source is responsible for sending out its own adverse action notices.
- Conduct periodic, internal audits to ensure compliance with the policies and procedures you adopt.
This article is adapted from A Dealer Guide to Adverse Action Notices. Please see NADA’s Driven Management Guide section for the Adverse Action driven guide and all the other Guides offered.