Mythbusters: A Dealer May Rely on an Adverse Action Notice Sent by a Finance Source

Sept. 18, 2022

By Michael G. Charapp
Charapp & Weiss LLP


Some myths return on a delayed schedule like cicadas emerging every seven years. One we have seen resurrected on more than one occasion concerns adverse action notices for consumer credit applicants.

Once again, there seems to be a myth spreading that a dealer may rely on an adverse action notice issued by a finance source. That myth is BUSTED!

It has been more than fifteen years since some adverse judgments against car dealers led attorneys to advise dealers they must issue adverse action notices to consumers under appropriate circumstances regardless of the actions of the finance sources. Given the number of questions we have recently received on this subject, it is time for a refresher.

Adverse action notices

Under the Equal Credit Opportunity Act (ECOA), adverse action is defined as “a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested.” The Fair Credit Reporting Act (FCRA) incorporates the same definition as in ECOA, and then adds a “catch-all” definition that includes “any action taken or determination that is … adverse to the interests of the consumer.”

Both ECOA and FCRA require adverse action notices. However, FCRA requires the notice only when either a credit report or information from another third-party source is used to make a credit determination. One form can satisfy both notice requirements.

Under what circumstances must a dealer give an adverse action notice?

Notices should be issued when:

  • The dealer makes a negative credit determination on the spot which includes a decision not to send the credit application to any finance source.

Scenario 1: Consumer fills out a credit application and, in the section asking for a phone number, the consumer writes “none.” The salesperson shows the application to the desk manager who says, “no phone, no loan.” The salesperson conveys this to the consumer and the consumer leaves. The dealer should either hand the consumer a copy of a properly completed adverse action notice or mail a copy to the consumer’s address on the credit application.

  • The dealer submits the customer's application to multiple finance companies through a credit portal like Dealertrack or Route One and no finance company approves credit.
  • The dealership submits the credit application directly to finance sources, but none will approve credit.

Scenario 2: Salesperson takes a credit application from a consumer. The desk manager runs a credit report and immediately notices a low credit score and a recent repossession. The desk manager refuses to authorize a spot delivery but refers the consumer to the special finance department. The special finance manager then explains to the consumer that he will contact a couple of different finance companies and call the consumer if he can get an approval. The consumer leaves. The special finance manager cannot find anyone willing to approve the application. The dealer should mail a copy of the adverse action notice to the consumer’s address on the credit application.

  • Financing is unavailable after a spot delivery.

Scenario 3: Customer takes delivery of a vehicle. Dealer cannot find a finance source willing to buy the paper. Dealer sends a cancellation letter (a/k/a “notice of rescission,” “notice of election to cancel,” etc.) to customer, demanding return of the vehicle. Dealer should issue an adverse action notice along with the cancellation letter.

  • A customer applies for specific credit/lease terms but does not qualify for those terms and does not accept a counteroffer.

Scenario 4: Consumer sees an ad promoting a national 0% interest program from an OEM. Consumer visits the dealer, picks out a vehicle and mentions to the salesperson that he is interested in 0% financing. The salesperson takes a credit application from the consumer, the desk runs a credit report and determines the customer does not qualify for the 0% program. The desk then offers financing at 10.5%. The customer is not interested in anything other than the 0% financing and walks out. The dealer should either hand the consumer a copy of the adverse action notice or mail a copy to the consumer’s address on the credit application.

To those dealers who ask why they must send their own adverse action notices besides those sent by creditors, it is because the courts have said it must be done. Under the law, a dealership is a creditor like a finance source. As a separate creditor, a dealer must issue its own adverse action notices.

We will be back to bust this myth again in a few years.