Chicago Automobile Trade Association

Court: If dealer fails to submit credit application, then dealer must explain why loan is denied

November 22, 2010
A dealer who fails to submit a consumer's credit application to a bank or finance company must notify the consumer that his credit has been denied-and why, according to a recent case before the 7th U.S. Circuit Court of Appeals involving a Chicago dealer. Failure to submit a customer's credit application to a bank or finance company is tantamount to denying the customer credit, the appellate court ruled. The Equal Credit Opportunity Act was enacted in 1974 to prohibit discrimination in credit transactions, then amended in 1976 to require creditors to give written notice of the specific reason(s) why consumer credit is not granted. "While an automobile dealership is sometimes considered merely an 'arranger' or 'referrer' with regard to credit, here (the dealership) effectively became the denier of credit," the circuit judges wrote. "We find that the decision not to submit a credit application to any lender does constitute an adverse action." The plaintiff in the case, a woman whom the dealership determined from a credit report would not be eligible for financing, had received a direct-mail notice indicating that she was "preapproved" for financing. The dealership indicated that it was common practice not to seek financing for those it determined to be ineligible for credit. However, the dealer indicated in court documents that he did not notify such customers they were denied "with the syllogism that one who is unable to grant credit cannot deny credit either." The judges ruled, "If a dealership that decides against referring a particular applicant to any lender need not provide notice of this decision to the applicant, then it becomes significantly easier for it to discriminate." "If creditors know they must explain their decisions (to suppress a credit application) . . . they [will] effectively be discouraged" from discriminating, the judges wrote. Dealers can avoid the sanctions of this decision by submitting all applications to a lender, even when they know one will be rejected, so that the lender sends out the appropriate notice.


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