By J. Jean Noonan*
Car dealers, car buyers, and even courts have long been uncertain whether a car dealer is a “creditor” under the Equal Credit Opportunity Act and Regulation B, which must give a consumer does not qualify for credit. The U.S. Court of Appeals for the Sixth Circuit recently affirmed a lower court ruling that the car dealer was a creditor and violated the ECOA and Reg. B when it did not provide a notice of adverse action. Here’s what happened.
SeTara Tyson bought a used car from Sterling Rental, Inc., doing business as Car Source. Tyson qualified for a grant from the State of Michigan for the down payment. She provided Car Source with her two most recent pay stubs, which included her year-to-date earnings. The dealer entered her income into the computer program for Credit Acceptance Corporation — the intended assignee of the contract — but the entered amount was incorrect and considerably overstated her income. Based on the CAC program, Car Source structured the terms of the contract to generate the most favorable terms for the dealership that would keep Tyson’s monthly payment below CAC’s maxium payment based on her monthly income. Tyson signed a retail installment sale contract and left the dealership with the car. For Car Source, so far, so good.
Two days later, Tyson returned to Car Source in response to a call from the dealership. At this point, things began to go downhill for Car Source. During the intervening two days CAC informed Car Source that Tyson’s monthly income on the application was wrong. Because of this error, CAC would not pay an advance to Car Sorce. Car Source asked Tyson to pay an additional $1,500 down, but Tyson declined and ultimately left the car with the dealership. Car source did not provide Tyson with an adverse action notice. Tyson sued Car Source and its owners in federal district court for violating the COA by failing to give her an adverse action notice and for their conversion of her car under Michigan law. The trial court granted summary judgment to Tyson on the adverse action issue, holding that Car Source was a creditor under the ECOA and Reg. B. However, the trial court denied Tyson’s request for an injunction, holding that equitable relief is not available to private parties under the ECOA. The trial court also denied her claim for conversion. Both sides appealed.
The appellate court noted that the adverse action issue turned on whether Car Source was a “creditor” under the ECOA and Reg. B. The ECOA says that a “creditor” is
- 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 toe extend, renew, or continue credit.
Reg. B treats these three types of creditors differently. In particular, a person who qualifies as a creditor under clause (2) is considered a creditor only for the purpose of the ECOA’s rules against discrimination and discouragement on a prohibited basis. In other words, middlemen who merely arrange credit need not give adverse action notices. Car Source and its owners argued that Car Source was only a middleman between Tyson and CAC and that CAC was the “true” creditor.
The appellate court disagreed. It held that car source regularly participate din the credit decision by setting the terms of the credit. The court noted the testimony of a Car Source owner that the company determines how much to finance, how much interest to charge, and the size of the monthly payments. CAC’s only role in the transaction is to determine whether to pay an advance under the terms set by Car Source.
In this case, the Sixth Circuit joined the Seventh Circuit in holding that a dealer is a creditor taking adverse action when it declines to refer an application to potential assignees. But this case extended the rulin in Treadway v. Gateway Chevrolet Oldsmobile Inc., 362 F.3d 971 (7th Cir. 2004) The Tyson case held that even a middleman is creditor if it regularly participates in credit decisions and takes an adverse action.
The Sixth Circuit also held that the ECOA permits a court to award injuctive relief, reversing the trial court on this point. Finally, the appellate court held that the trial court erred in denying Tyson’s claim for conversion. Car Source’s rights to the car had terminated by the time Tyson returned the car to the dealership. Therefore, Tyson had a claim against Car Source for conversion.
What is the significance of this case for dealers, especially those in Sixth Circuit states of Michigan, Ohio, Kentucky, and Tennessee First, almost every dealer is a creditor who participates in the credit decision. In an indirect credit transaction, the dealer is the original creditor. Dealers typically set the terms of the contract, even though they may consult the rate sheets of potential assignees when doing so.
Every dealer should have procedures in place for giving applicants averse action notices when they take adverse action. For consumer applicants, these notices must be in writing. The notices can either contain the principal, specific reasons or say that the dealer will provide the reasons on request. There are other requirements for adverse action notices, so consult your legal counsel.
Dealers often ask if they are required to send an adverse action notice if the potential assignees send adverse action notices to the consumer. That question remains unanswered by courts in many parts of the country. Reg. B permits one creditor to send an adverse action notice on behalf of another creditor. Let’s take the case where the dealer sends the car buyer’s application for a credit decision to Bank A and Finance Company B. Both potential assignees decline the application and send adverse action notices. A good argument exists that those notices take care of the dealers obligation if the notices meet the Reg. B. requirement that the notices identify the dealer.
In the Tyson case, Car Source could not rely on this argument. CAC was apparently willing to take assignment of the Car Source contract; it simple was not willing to pay the dealer an advance. The appellate court correctly noted that the determination regarding the advance was a consequence that feel solely on Car Source and did not affect Tyson. In this situation, Car Source alone made the adverse action decision.
The final question in dealer adverse action cases is, “What reason should the dealer give the consumer who doesn’t get credit?” Sometimes dealers assert that the reason is something like, “No finance source would buy your contract on terms acceptable to me.” Although this may be true, it does not qualify as a specific reason for denial. The dealer must be prepared to tell the consumer the reason why no finance course would but the contract. If the dealer isn’t sure why, he or she should ask.
With the Tyson case, the compliance world has gotten tougher for dealers. Courts can award individual consumers up to $10,000 in punitive damages for failing to give a proper adverse action notice, in addition to court costs and attorneys’ feed. In a class action, damages are capped at $500,000 or 1 percent of the dealer’s net worth. The Federal Trade Commission can seek $40,000 per violation in an ECOA enforcement action. These potential costs make ensuring your adverse action compliance procedures are up to snuff a very wise investment.
Tyson v. Sterling Rental, Inc., 2016 U.S> App. LEXIS 16258 (6th Cir. (E.D> Mich.) September 2, 2016).
*L. Jean Noonan is a partner in the Washington, D.C., office of Hudson Cook, LLP. Jean can be reached at 202.327.9700 or by email at email@example.com.