Reprinted with permission.
This is a must read ALL THE WAY TO THE BOTTOM article. If you think you understand Adverse Action, you may be quite surprised.
Written By: David R. Missimer
General Counsel – VP
A question often asked is whether a dealership may be sued by a consumer for failing to provide an adverse action notice as required by the Fair Credit Reporting Act. In 2003 the Fair Credit Reporting Act was amended to provide in Section 1681m(h)(8) that no civil actions could be filed by private individuals for Section 1681m violations. The FCRA in Section 1681m provides that a user of a consumer report, in this case an automobile dealership, must provide an adverse action notice to a consumer when credit is denied, not even submitted for approval, or not granted upon the terms requested, and the decision is based on whole or in part on information contained in a consumer report. Within the retail automobile sales industry there have always been questions regarding who in the auto financing scenario has the responsibility to prepare and forward an adverse action notice when required. The position of many dealers was the end lender is making the credit decision and is responsible for sending adverse action notices. The 2003 amendment to the FCRA eliminating any private cause of action against dealers who fail to provide an adverse action notice was deemed as good news until 2006 when a Federal District judge in Virginia decided the case of Barnette v. Brook Road, Inc.
Barnette was a suit by the purchaser of a vehicle from Brook Road, Inc. that went south for a number of reasons. The end result was that the dealership repossessed the vehicle, and Barnette brought claims for violations of the Equal Credit Opportunity Act, Fair Credit Reporting Act, the Virginia Consumer Protection Act, the Uniform Commercial Code, as well as common law actions for fraud, conversion, and breach of contract. Barnette’s claim under the Fair Credit Reporting Act was that the dealership never provided a notice of adverse action. The dealership moved to dismiss the Fair Credit Reporting Act claim arguing that the private right of action for claims under 1681m of the FCRA were eliminated by the 2003 amendments. The judge denied the dealership’s motion to dismiss. In her written decision denying the dealership’s motion, the judge went to extravagant lengths to find that the amendment precluding a private cause of action under Section 1681m only applied to Subsection (h) of the Section and not to all of Section 1681m. The decision in Barnette v. Brook Road, Inc. was not appealed, and was contrary to a vast majority of other decisions on the issue of whether there was any private cause of action for failure to provide adverse action notices under the Fair Credit Reporting Act.
Since the decision in Barnette v. Brook, only one other District Court has followed the Barnette ruling. In 2009, in the Northern District of California, a District Court judge found in Kubbany v. TransUnion that the Barnetteanalysis was persuasive, and held that the exclusion of civil actions in Section 1681m applied to only Subsection (h) causes of action.
Both the Barnette decision and Kubbany decision stand in stark contrast to the overwhelming majority of Federal Court opinions interpreting Section 1681m of the Fair Credit Reporting Act. The 7th Circuit Court of Appeals and over sixteen other Federal District Court opinions have all held that there is no private right of action for violations of Sections 1681m of the Fair Credit Reporting Act. Not only do Barnette and Kubbany stand opposite to the overwhelming majority of decisions on the issue, but there are also opposite decisions rendered by Judges within the same District. In April 2011, Judge Hudson sitting in the United States District Court for the Eastern District of Virginia, Richmond Division ruled that no private right of action exists for violations of 1681m of the Fair Credit Reporting Act. In rendering the decision, Judge Hudson noted that virtually every District Court, and the only Federal Court of Appeals to address the issue had found that there is no private cause of action for violations of Section 1681 of the Fair Credit Reporting Act. Judge Hudson rejected the reasoning of his colleague in Barnette. In 2010, the District Court in the Eastern District of California addressed private causes of action under Section 1681m of the Fair Credit Reporting Act in Baga v. Allstate Insurance Company. Holding that no private cause of action existed for failure to provide an adverse action notice under Section 1681m of the FCRA, the Court ruled that although the 9th Circuit had not addressed the issue, the majority of decisions by California District Courts were consistent in concluding that Section 1681m provides no private cause of action. The sole exception to these decisions in the State of California was Kubbany v. TransUnion.
Given the overwhelming majority of Federal Court decisions that have ruled on the subject, one can only conclude that there is no private cause of action for failure to provide an adverse action notice under Section 1681m of the Fair Credit Reporting Act. The exception would be if a user of a credit report was a named defendant in one of two particular courtrooms, one in Virginia and one in Northern California. So, the answer to the question: Can my dealership be sued by a private individual for failing to provide an adverse action notice under the FCRA?, is no. This question and answer, however, are misguided. A dealership may still be held liable by the Federal Trade Commission for failing to comply with Section 1681m by providing adverse action notices to consumers who are denied credit, or granted credit on terms that are different from that requested, and said counteroffer is not accepted. In addition, even though a private lawsuit may not be brought against a dealership for violating Section 1681m of the FCRA, a dealer may be sued privately for failing to provide adverse action notices under a different Act.
The Equal Credit Opportunity Act requires a creditor that takes “adverse action” on a consumer credit application to provide a “statement of reasons” for the adverse action. The ECOA defines adverse action as a denial or revocation of credit, a change in terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the same terms requested. Therefore, any denial of credit, or a decision on behalf of the dealership not to even submit a credit application, will require an adverse action notice to be forwarded. An adverse action notice does not need to be forwarded under both the Fair Credit Reporting Act and the Equal Credit Opportunity Act. An adverse action notice issued in either instance will cover the creditor under both Acts.
Unlike the FCRA, the ECOA does provide consumers the right to bring a private cause of action when a creditor violates the terms of the ECOA by failing to provide an adverse action notice. Although the purpose of the ECOA is to prevent discrimination against those applying for credit, the Act also contains notice requirements providing that an applicant for credit against whom an adverse action is taken shall be entitled to a statement of the reasons for such an action from the creditor. The law provides that a consumer may bring a civil action against any creditor who fails to comply with any requirement imposed under the ECOA, including failure to provide an adverse action notice. A claim against a creditor for failing to provide an adverse action notice may be brought even if the consumer does not allege any discrimination. In other words, the adverse action notice required under the ECOA is required in each and every credit transaction covered by the ECOA, and is not contingent upon any claim of actual discrimination.
Regulations under the ECOA, and case law define a creditor, for purposes of the Act, as any person who regularly extends, renews or continues credit, or any person who regularly arranges for the extension, renewal or continuation of credit. Regulations further define a creditor as “a person who, in the ordinary course of business, regularly participates in a credit decision, including the terms of credit.” The definition of creditor under the Statute, and regulations, places most dealerships squarely under the term “creditor”. Only in those situations where an automobile dealer does not participate in credit decisions, but only accepts applications and refers the applicants to creditors, may the dealership be exempt from providing an adverse action notice. Any participation by the automobile dealership in the credit decision, be that by establishing the rate, setting any other term of the credit, or benefiting financially by the issuance of credit, places an automobile dealer under the heading of creditor as defined by the ECOA and various regulations.
As a creditor under the ECOA, it is the responsibility of the automobile dealership to issue adverse action notices when required by the Act. Failure to issue an adverse action notice will not subject a dealership to a private cause of action under the Fair Credit Reporting Act, but will subject the dealership to a private cause of action under the Equal Credit Opportunity Act. This liability is not restricted to cases where no adverse action notice is sent by any entity involved in the credit transaction. There are cases in which a dealer has been found liable under the ECOA for failure to issue an adverse action notice despite the fact that the end lender issued an adverse action notice. Courts ruling on the subject have found the obligation is on each creditor to issue the adverse action notice. Therefore, adverse action notices issued by the third party lender do not absolve a dealership from issuing its own adverse action notice.
Putting aside the exposure to liability from consumer suits, government agencies enforce both the FCRA and ECOA, and can assess fines against entities failing to comply with either act. For automobile dealerships the Federal Trade Commission has the authority to enforce compliance with the FCRA and the ECOA. The ECOA requires creditors to maintain paperwork in the form of credit applications, credit reports, documents verifying an adverse action notice was provided, the reasons for denying credit, and any written statements submitted by a consumer alleging any violation of the Equal Credit Opportunity Act. These documents must be kept for a period of five years from the date the credit decision was made. Retention of these documents will make them available to defend any claim filed by a consumer. Required document retention also makes it fairly simple for a government agency to audit your compliance with certain aspects of the FCRA and ECOA. Given the current administration’s push to clean up the consumer lending market place, now may be a very good time to assess your dealership’s compliance with the notice requirements of the Fair Credit Reporting Act and Equal Credit Opportunity Act.
David R. Missimer
General Counsel – VP
Automotive Compliance Consultants, Inc.