Believe it or not, I probably get more questions about adverse action notices and risk-based pricing notices than any other topic. Let’s try to simplify and understand both: when you have to send them, and why.
Adverse Action Notices
Adverse action is denying credit; offering credit but not on the terms the customer wants; or changing signed credit terms (such as unwinding a spot deal and writing up a new contract) in a way that is unfavorable to the customer. That’s it.
First thing to remember: If you finance the customer and get the contract bought, there is no adverse action and you don’t have to send an adverse action notice. Otherwise, adverse action notices indicate the final status of the customer’s credit application if you can’t get the customer financed or if you need to change the terms of the customer’s signed contract financing in a way that is unfavorable to the customer. Adverse action notices are intended to notify the customer that they either didn’t get credit or couldn’t get credit on the terms they wanted. They also give the name of someone at the dealership to call within 60 days if they want the reasons, but few people ever call. If they do call, you should get two reasons from the deal jacket (e.g., income, too many delinquencies, length at job, too many recent credit inquiries), but not “low credit score” as that requires a slew of other disclosures.
New information about credit scores is required to be included in adverse action notices by the Fair Credit Reporting Act (“FCRA”), as amended by the Dodd-Frank Act of 2010. It all starts with receiving a credit application from the customer. You have 30 days from receipt of a completed credit application to decide what the final outcome is and send an adverse action notice in three, and only three, circumstances, which include:
You take the customer’s credit app but don’t send it to any lenders based on the customer’s credit score or credit report being too negative. You in this case are the sole creditor and you have denied credit to the customer.
You and the customer enter into a spot delivery agreement that you can’t get financed. You have to unwind the spot delivery and change the credit terms, almost always in a way that is negative to the customer (higher rate, longer term, higher payments, etc.). This is adverse action.
You offer the customer credit, maybe rehash with the lender and negotiate with the customer, but at the end of the day the customer declines your final offer (technically a counter offer) of credit. You offer five percent for 72 months; the customer wants 3.5 percent for 60 months which you can’t or won’t do. In this situation, you have not given the customer credit “in substantially the amount or on substantially the terms” requested by the customer in the negotiation process. This too is considered adverse action.
Again, if you finance the customer on any terms and get the contract bought, there is no adverse action and no adverse action notice is required.
You can’t rely on a lender’s adverse action notice because it gives different information than you are required to give. It names a different federal agency for monitoring compliance in the notice on the bottom; it discloses the credit bureau and credit score used by the lender (which you won’t know and which is likely to be different from yours); and typically gives the lender’s reasons which you don’t know. Lender adverse action notices don’t even name your dealership for the most part. Because you were actively involved in negotiating the credit terms, you have to send your own notice and reveal the credit bureau you pulled, the credit score, and additional information about the credit score (four to five factors that negatively affected it) and that is different from what the lender has to reveal. The law requires both you and the lender to send separate adverse action notices to the customer.
That’s it. Remember if the customer accepts any offer of credit and you complete the deal, there is no adverse action and no adverse action notice needed. If you pull your credit report from an entity like Dealertrack, you will get both an adverse action notice and a risk-based pricing credit score disclosure notice customized for the consumer. You can use either or both of these for the customer.
Risk-Based Pricing Notices
These were a creation of the 2003 FACT Act and federal regulations that took almost eight years to write. The idea is to give the customer up front an idea of what their credit looks like so they can work on improving it. It is a front-end notice unlike an adverse action notice which is a back-end notice.
The Federal Trade Commission’s (FTC) Rule contains detailed formulas for calculating who should get and who should not get a regular risk-based pricing notice based on the credit terms they got in relation to the dealer’s customers as a whole. Very complicated, but it contains an important exception: You don’t have to worry about all that if you give every customer who submits a credit application what is called a “credit score disclosure notice.”
This credit score disclosure notice tells the customer what their credit score is and where their score ranks in a national sample of scores. The idea is the customer can work to try to increase their credit score. As a front-end notice, you must give the credit score disclosure notice to the customer “as soon as reasonably practicable” after getting their credit score and not later than the earlier of consummation of the deal or three business days. Although not required, it is a good practice to hand the notice to the customer and get them to sign a copy, acknowledging receipt.
Dealers who don’t typically pull credit get a raw deal. The FTC still requires you to give the credit score disclosure notice and buy a credit score to do so. The reasons for this are not important. It’s just what you have to do.
Now, technically, if you give a customer an adverse action notice, you don’t have to also give them a risk-based pricing notice. But this technicality is dangerous. For many customers you won’t know within the three business day limit for sending the credit score disclosure notice whether or not you will ultimately get them financed. If you get them financed on day 21, you are out of compliance because you didn’t give them a timely credit score disclosure notice. There is no downside to giving every consumer who applies for credit a risk-based pricing credit score disclosure notice. It’s also simpler, and simple is good. If it turns out you ultimately don’t get them financed, then send an adverse action notice as well. But only if that is the case. Your credit bureau contracts will prohibit you from giving adverse action notices to everyone and it will also upset a lot of your customers who have good credit and received financing.
You don’t need the customer to sign either notice and you can send them by first class mail or hand them to the customer personally (in which case getting a signature on a copy is a good idea). In the deal jacket, keep a copy along with a notation of the date you sent either of these notices. Don’t email them because they contain the customer’s credit information and Web-based email is not a secure means of communication.
Knowing exactly when to send…and not send…adverse-action and risk-based pricing notices can save you considerable time and resources in qualifying a customer for credit, as well as lead to increased customer satisfaction with your dealership.