Auto dealers are subject to the requirements of both the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA). Both laws share the same intent: to protect the consumer. The ECOA’s purpose is to ensure that any entity that extends credit does so “with fairness, impartiality, and without discrimination.” The purpose of the FCRA is to ensure “accuracy and fairness of credit reporting.” Both the ECOA and the FCRA require creditors to send adverse action notices in certain circumstances.

Adverse action is defined in the ECOA as “a refusal to grant credit in substantially the amount or on substantially the terms requested.”  The FCRA incorporates that same definition when applied to a credit transaction. The difference with the application of the FCRA’s requirements is that the denial of credit is based upon information in a report from a credit reporting agency (CRA) or information obtained from a third party other than a CRA. Contrary to what some dealers believe, adverse action obligations may exist even if a customer’s credit report is never pulled.  Adverse action includes more than just a simple denial of credit. If the creditor makes a counteroffer to extend credit under different terms or in a different amount than what was initially requested and the customer refuses those conditions, this is also adverse action.

The ECOA defines “creditor” as “any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.” The FCRA adopts that definition as well.

Auto dealers should always send adverse action notices when faced with the following situations: 1) the customer submits a credit application, but the dealer does not send it to a bank or finance company; 2) the customer cannot be financed because no finance source approves the deal on terms acceptable to the dealership or 3) the customer does not accept or use the credit offered.