Compliance remained a hot topic of conversation this year at the NADA Convention, and at the American Financial Services Association Vehicle Finance Conference, which preceded it.
Unlike the discussions at last year’s convention about big fines and the assault on auto finance, the talk this year centered on a variety of topics. Questions and comments revolved around what changes the industry might expect to the Consumer Financial Protection Bureau (CFPB) and its leadership, structure, and the way the agency conducts its business under President Trump’s administration.
Speculation prevailed, but one conclusion was unanimous: Consumer financial regulation will not go away, regardless of which federal or state agency is tasked with protecting consumers.
As of February 10, the date of this writing, no changes have occurred at the CFPB. Nor have there been any presidential executive orders doing away with Regulations B, M, or Z.
These regulations and other consumer protections were in place long before the CFPB. They have existed through numerous administrations, and control of the legislative branch by both parties.
Rather than worrying about how the CFPB may or not be gutted, we would do well to remind dealers to review their compliance policies, procedures, and processes. Are these compliance procedures robust and useful, or are some so oversimplified they may put you at risk?
One compliance practice I fear may be getting watered down at some dealerships is how they administer adverse action notices. In their eagerness to streamline this step, I’m afraid they are setting themselves up for problems.
The requirement to provide certain (my emphasis) customers an adverse action notice in certain situations is regulated by the Equal Credit Opportunity Act (ECOA), and Regulation B.
I recently came across a dealership that issued every customer an adverse action notice after credit was run, and before any credit decision was made. I believe the practice was initiated by the dealership to be sure no one who should receive an adverse action notice was missed.
Here’s why this is bad practice:
- It oversimplifies the intent of the regulation. In my opinion, this dealer’s practices do not comply with the ECOA.
- It communicates that the dealership neither understands the regulation nor wants to understand how to use it properly.
- It will create blowback from well-qualified buyers who either receive an adverse action notice before the process even begins in the showroom, or two weeks after they have consummated the sale.
Issuing an adverse action notice to a prospective customer prior to a credit decision being made does not satisfy the ECOA and Regulation B. Both the statute and regulation make clear the notice is to be provided after an adverse action is taken.
The law is very clear, but space is not available here for me to detail this law. If you would like to review the pertinent part of the law, contact me at the email address in my author bio and ask for ECOA: 15 USCS § 1691 and Regulation B: 12 CFR 1002.9.
Question: If a customer is delivered an adverse action notice before any credit decision has been made, does the notice cover any future adverse action that may be taken at the customer’s request for credit?
I do not believe so. The reason is simple: The law requires the creditor to state the causes of the adverse action or to provide the grounds of denial upon written request.
When the system spits out an adverse action notice to a customer that denies credit before a decision has been made, the question naturally is: For what reason was the notice given?
At this stage of the process, there is no reason because no decision, good or bad, has been made. The document delivered to the customer is nothing more than a meaningless piece of paper.
I trust the requirement for an adverse action notice occurs less frequently at your dealership than cases where customers are approved for financing. Your adverse action procedure, however, should show that your personnel understands the law relating to the notice, know when a notice is required, and complete the notice in the appropriate manner.
Oversimplification, however, may lead to unintended, costly consequences. Review the way you deliver adverse action notices, and avoid having to pay money out on a deal you never made.
David R. Missimer, dmissimer@compliantnow.com, is general counsel for Automotive Compliance Consultants Inc. He spent 28 years in private practice as a litigator representing lenders, auto dealers, and numerous other entities and individuals. Missimer has worked with dealership compliance issues since 2003 as co-founder of ACC. He is a member of the National Association of Dealer Counsel, American Financial Services Association, and National Automotive Finance Association.
