Is Less Than Best Financing Rate 'Adverse Action' That Requires Notice to Customer?
By Jean Noonan*
Several courts have held that insurers who have charged customers more for their insurance than the best rate available were required to send adverse action notices to the customers. The cases have created a lot of buzz among car dealers and sales finance companies who are wondering how these cases apply to car credit. If you are one of the ones doing the wondering, you and Congress are thinking along the same lines.
As part of the Fair and Accurate Credit Transactions Act amendments to the Fair Credit Reporting Act, Congress directed the Federal Trade Commission and the Federal Reserve Board to come up with a rule that would address risk-based pricing. There are two approaches to such a rule under consideration: (1) an adverse-action-like notice that tells a consumer after the offer is made that he or she didn't get the best terms due to his or her credit history; or (2) a generic notice, probably at the time of application that says an applicant's credit history may affect the terms he or she receives. These are two very different approaches.
The agencies have been unable to agree on which approach to follow, even for the purpose of a proposed rule. Until there is a final rule, there is no legal requirement to give a notice based on risk-based pricing in a credit transaction.
The situation is different for insurance transactions. Several courts have found that a higher insurance premium based on the applicant's credit report triggers an adverse action notice under the FCRA. We think that the answer is different for creditors for two reasons.
First, under the Equal Credit Opportunity Act, it is not adverse action to offer the consumer less than the best financing terms unless : (a) the consumer requested certain terms; (b) the creditor offered different, less-favorable terms; and (c) the consumer rejected this counteroffer. The first criterion is the tricky one. Most dealers and auto finance companies try to set things up so the consumer doesn't request specific terms – the dealer or finance company just makes an offer. But this is a very fact-based situation and sometimes consumers do request specific financing terms. If the consumer tells the dealer "I can pay only $1,000 down" or "I want financing for 6 years," and the dealer or finance company offers a deal that requires a larger down payment or a shorter repayment period, a court might conclude that the dealer or finance company made a counteroffer. That gives rise to the requirement to give an adverse action notice if the consumer doesn't accept the offer.
In situations where the consumer doesn't request specific terms (or in which the dealer or finance company meets those terms) but the rate is not the lowest available, there is no adverse action.
The second reason the answer differs for insurance companies and creditors is that the FCRA has different definitions of adverse action for insurance and credit. For credit, the FCRA adopts the EOCA/Regulation B definition. So if a situation is not "adverse action" for the ECOA (as described above), it is not adverse action under the FCRA. The FCRA adverse action definition for insurance specifically mentions an increase in cost due to credit history, and it is this language the courts have relied on in holding that FCRA adverse action notices are required when the premium is higher due to credit history.
Notice that, even when a rule is promulgated under the FCRA risk-based pricing amendment, it will not be an "adverse action" notice, within the meaning of either the FCRA or ECOA. I don't feel that dealers must give adverse action notices to all borrowers who get a less-than-best rate due to credit history. But I would encourage you to do two things:
(1) Keep an eye on the regulatory agencies' actions on the risk-based pricing notice rule. Spot Delivery and other auto finance publications will cover this issue and provide updates.
(2) Take a look at your counteroffer procedures to be sure you are in good shape regarding the situation described above.
Once again, this is a tricky area, so be sure and discuss your procedures with your lawyer.
* Jean Noonan is a partner in the District of Columbia office of Hudson Cook, LLP . She is a recognized speaker on Fair Credit Reporting Act issues and can be reached at 202-327-9700 or by email at jnoonan@hudco.com . |
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