In a case decided April 2, 2004, the United States Court of Appeals for the Seventh Circuit ruled that an automobile dealership can have liability under the Equal Credit Opportunity Act (“ECOA”) for failing to provide an “adverse action” notice to a customer, when the dealership decided not to submit the customer’s credit application to any lender based on the customer’s credit rating. This is the first time this issue has been addressed by a federal Court of Appeals.
The ECOA was originally enacted in 1974 to prohibit discrimination in credit transactions. The Act was amended in 1976 to require creditors to furnish written notice of the specific reasons why an adverse action was taken against a consumer.
In Treadway v. Gateway Chevrolet, Oldsmobile Inc., the Seventh Circuit decided that an automobile dealership’s unilateral decision not to submit a credit application to any lender constituted an “adverse action” for purposes of the ECOA. Consequently, the dealership faced liability for failure to provide the consumer notice of the “adverse action” and the reasons for the adverse action.
Tonja Treadway sought financing to buy a used automobile from Gateway Chevrolet Oldsmobile. Gateway had solicited Treadway with a direct mailing indicating she was “pre-approved” for financing to purchase a car. Treadway called the dealership and gave them her social security number so they could pull her credit report. After reviewing her credit report, Gateway decided that it would be futile to send her application to any lender. Instead of notifying her of this decision, however, Gateway indicated that it could get her financing if she had a co-signer. Treadway was able to produce her godmother, Pearlie Smith, as a “co-signer,” but it ultimately turned out that Gateway never obtained financing for Treadway, and instead arranged for her godmother to purchase the car directly. Treadway alleged that her godmother signed the papers without reading them, and claimed that neither she nor Smith knew the car was titled in Smith’s name. Although Gateway ultimately got Treadway into a vehicle based on her godmother’s credit, it never attempted to obtain financing for Treadway based on her own credit, as she requested. After Treadway made the first payment on the note on behalf of Smith, both Smith and Treadway refused to make further payment and the car was repossessed. Treadway filed a suit against Gateway under the ECOA and the Fair Credit Reporting Act (FCRA) based on the dealership’s failure to notify her that it did not send her application to any lender.
Automobile dealers have long been considered “creditors” for purposes of the anti-discrimination and anti-discouragement provisions of the ECOA. The regulations define “creditor” as:
- Many courts have held that automobile dealerships are “creditors” for the anti-discrimination purposes of the ECOA, because they regularly refer applicants or prospective applicants to creditors, or select or offer to select creditors to whom requests for credit may be made. In these situations, the lender to whom an application is submitted, rather than the dealership, is responsible for providing an adverse action notice if the application is denied. Thus, this portion of the ECOA does not require a dealer who has merely submitted an application to a financing source to provide an adverse action notice to a customer if the financing source declines the application.
The ECOA also defines a “creditor” as “any person who regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.” The Court ruled that Gateway was also a “creditor” under this portion of the ECOA because it “regularly participates in a credit decision, including setting the terms of the credit.”
As one court has summarized, there is “a continuum of participation in a credit decision from no participation, to referring applicants to the decision maker, to final decision making. At some point along the continuum, a party becomes a creditor for purposes of the notification requirements of the Act.” The Court had no trouble in finding that Gateway fell on the “creditor” side of the continuum.
First, Gateway admitted that it regularly decided not to send an applicant’s credit application to any lender. By making this decision, Gateway not only “participated” in the decision of whether to extend credit-- it made the decision itself. Second, Gateway frequently participated in the credit decision by restructuring the terms of the sale to meet the concerns of the creditor. For instance, to get a lender to change its mind and extend credit, Gateway might: (a) insist on more money down; (b) request that the applicant find a co-signer; or (c) lower the price of the car in order to lower the loan-to-value ratio. The Court said:
- Gateway’s actions are distinguishable from the common scenario in which an automobile dealership decides to send a credit application to a limited number of the many lenders with which it works. The Federal Reserve Board has clearly indicated that merely “selecting creditors to whom applications will be made” does not make one a “creditor” for purposes of the notice requirements of the ECOA... In that situation, at least one lender is given the opportunity to decide whether to extend credit. Therefore, it is the lender, rather than the dealer, that makes the credit decision. Where the dealer decides not to send out the application at all, however, it is making the credit decision. Moreover, if the dealer sends the application to at least one lender, there is another party that can provide notice to the applicant. Where the dealer decides not to send out the application at all, only the dealer can provide notice.
Gateway argued that it did not have to provide an adverse action notice under the ECOA because it did not provide financing for the cars sold or leased. Instead, Gateway argued, it merely attempted to arrange for financing for customers through banks or finance companies. The Court rejected this argument and said:
- While an automobile dealership is sometimes considered merely an “arranger” or “referrer” with regard to credit, here Gateway effectively became the denier of credit. Therefore, we must decide as a matter of first impression whether an automobile dealership’s unilateral decision not to submit a credit application to any lender constitutes an “adverse action” for purposes of the ECOA. Based upon the plain language, the commentary to and the purpose of the statute, we find that the decision not to submit a credit application to any lender does constitute an adverse action.
The Court observed that ECOA defines the term, “adverse action” as “a denial or revocation of credit.” By deciding not to send Treadway’s application to any lender, Gateway effectively denied credit to Treadway. Whether the lender or the dealership made the decision, the Court said, both the action and the outcome are the same.
In both cases, the decision maker (1) reviews the applicant’s credit report to determine whether she is creditworthy, (2) makes a determination adverse to the applicant (i.e., that she is not creditworthy), (3) decides not to proceed any further in arranging
credit and (4) as a result the applicant is not granted credit. There is no logical reason why these same steps would be considered an “adverse action” when taken by a lender but not when taken by a dealership, given that the result is the same in either case.
Any other interpretation of the statute, the Court said, would run contrary to the purpose of the strict notice requirement, which serves two purposes: it discourages discrimination and it educates consumers as to the deficiencies in their credit status.
The consequences of violating the ECOA can be significant. The statute provides for class actions and punitive damages of up to $10,000 in individual actions, and punitive damages up to $500,000 in class actions. In addition, a successful ECOA plaintiff can recover attorney’s fees and costs from the defendant. The statute of limitations for ECOA claims is two years.
The easiest way to avoid the problem of adverse action notices is to send all applications to at least one lender, regardless of how bad the consumer’s credit. Problems do occur in cases like Treadway, however. The consumer there did not fill out an application. The dealer merely pulled her credit report and decided that there was no point in submitting an application because the dealer knew no one would finance her. This is the exact situation that could trigger an ECOA lawsuit.
The Federal Reserve Board has created several sample notification forms which can be modified and used by creditors. These short forms essentially require that the creditor (1) describe the type of credit which the applicant requested as well as the adverse action taken, and (2) check off the creditor’s principal reasons for taking the adverse action from a pre-printed list. Consequently, every time a dealer pulls a credit report and decides that the consumer cannot get financing based on the consumer’s credit, the dealer should issue an adverse action letter. These adverse action letters should be maintained on file for at least two years after they are issued.