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NADA: Best for dealers to send adverse action notice to all customers who are denied credit

November 17, 2010
By Dennis M. O’Keefe, CATA Legal Counsel

A July 5, 2004, edition of the CATA Bulletin advised that dealers who fail to submit a completed credit application to a bank or finance company must notify the consumer that their credit has been denied and the reasons why, inasmuch as a failure to submit the application is tantamount to denying a customer credit. 


This so-called "Adverse Action Notice" is the subject of a new 28-page NADA publication, "Adverse Action Notices Guide," which the NADA mailed in June to its membership. 

In its Guide, the NADA stresses that it is providing "guidance to dealers in an unsettled and evolving area of the law in which many courts and dealer attorneys disagree as to the scope of dealers’ compliance obligations."  Notwithstanding this caveat, the Guide urges dealers to undertake general acts to safeguard themselves.


The operative part of the Guide states as follows: 

"The adverse action notice requirements apply to ‘participating creditors’—that is, creditors who ‘regularly participate in a credit decision,’ including setting the terms of the credit. . . . As a dealer, you are a ‘participating creditor’ if you "regularly participate in a credit decision.’

"In contrast, if you only refer customers or prospective customers to creditors, or select or offer to select creditors from whom the customer will directly request credit, you are what is called a ‘referral creditor.’ Referral creditors are not required to give adverse action notices, although they still are subject to the ECOA’s(Equal Credit Opportunity Act) rules against illegal discrimination.   

"Unfortunately, the ECOA and its regulations are unclear as to what it means for a dealer to ‘regularly participate in a credit decision.’ The courts have reached different conclusions in answering this question.


"In some cases, a dealer has been deemed to ‘participate in a credit decision’ when the dealer merely forwards the customer’s application to a bank or finance company for its determination. 

"Dealers have also been deemed to ‘regularly participate in a credit decision’ in a spot delivery credit sale.  Under some interpretations, a dealer may ‘regularly participate in a credit decision’ because the dealer regularly signs the retail installment sales agreement before sending it to a bank or other finance source."


Because of the above, the NADA Dealer Guide concludes that "because of the uncertainty as to how this important question will be resolved by a court, if a dealer regularly signs retail sales installment agreements with his customers, he should follow the ECOA rules for a "participating creditor," including the adverse action notice requirements.   

The Guide contains rules and examples as to when a "participating creditor" needs to send Adverse Action Notices. A sample notice recommended by the NADA is included as a flier in the print edition of this newsletter.


The CATA urges all its members to closely read the NADA publication and to comply with its recommendations and directives.