Use Caution When Denying Credit

Use Caution When Denying Credit

If a customer’s credit is denied, the Equal Credit Opportunity Act says that the customer must receive an adverse action notice explaining the reason for turndown. Dealers generally defer to the credit grantors to whom they submit the customers’ applications to comply with this requirement. This is permissible since the law provides that the notice from the credit grantor will suffice. However, what happens when the application is not forwarded to a credit source for consideration?

According to dealer lawyer Michael Charapp this situation usually occurs when an F&I officer determines that a customer’s credit is simply too poor to take the time to submit the application for approval. A plaintiff in a lawsuit may argue that the dealership (which will generally meet the definition of a creditor under the ECOA) that decided it would not submit the application took an adverse credit action for which notice must be given.

A recent case decided by a federal district court in Illinois demonstrates how risky that can be for a dealer. In the case, a daughter asked her mother to co-sign a loan with her. The dealership determined that the daughter’s credit was so risky that credit would be extended only to the mother and proceeded to finalize the deal with only the mother as the buyer. The daughter sued the dealership claiming that the failure to include her as a buyer for the vehicle purchased on credit was an adverse credit action for which notice was required under the ECOA.

The court agreed, and held that the dealer will be responsible for compensatory damages (and even punitive damages depending on further court findings).

What is the moral of this story? When a dealer takes a credit application to determine whether credit will be extended to a customer, the application should be submitted to a credit source. If the source denies credit, it will issue the notice of adverse action under its established process. The decision that the person cannot qualify for credit, so there is no need to submit an application to a credit source, can be considered an adverse action requiring notice under the ECOA. If the dealership does not give the notice, it may be found liable for damages.