An adverse action notice — it’s something consumers want to avoid at all costs, typically indicating you’ve been turned down for a loan or there’s something seriously wrong with your credit file.
Such notices are required by federal law when credit is denied. But in some cases, including car purchases, they may not mean what they say, and in fact may be frightening people unnecessarily.
Trust me on this.
I got one of these notices the other day and, not to brag, I’ve got sky-high credit scores, as might be expected for someone who gives consumer tips for a living.
Yet here was a letter from a local dealer related to my recent purchase of a used car that was in considerably better shape than the 10-year-old car I traded in.
“This letter is being sent to you because you were either denied credit or offered credit at lower terms than what you applied for based on your recent credit inquiry for a vehicle,” it says.
That’s not very clear, but the takeaway appears to be that the financing I arranged with the dealer had fallen through or that I’d been offered a better interest rate than my credit score deserved.
The letter cited vague explanations from the credit agencies that included “too few accounts currently paid as agreed” and “too many loans with recent delinquencies.”
Auto lenders use a FICO score range of 250 to 900. The higher the number, the more creditworthy the car buyer.
Again, I’m not showing off (much), but each of the three big credit agencies — Equifax, Experian and TransUnion — gave me a score of over 800 at the time of the car purchase. I’ve never missed a loan payment in my life.
So it was more than a little surprising that I was apparently being told I’m too risky to do business with.
“It’s very strange,” said Rosemary Shahan, president of Consumers for Auto Reliability and Safety, a Sacramento-based advocacy group. “For anyone with good credit, this would be a real insult.”
The intent is to prevent discrimination and to ensure that consumers are informed any time an action is taken by a creditor that could harm your credit score, such as a loan application being rejected.
Auto dealers are considered creditors when they arrange financing, so they take on the responsibilities of the laws any time they set up a loan, even though the dealer probably won’t be lending any money and will instead farm out the contract to a bank.
Now here’s where things get hinky. Thousands of dealerships nationwide outsource their credit-related responsibilities to a Michigan company called 700Credit, which describes itself as “the largest provider of credit and compliance solutions” to the auto industry.
“Complying with the Fair Credit Reporting Act and Equal Credit Opportunity Act regulations is not an easy or pleasant task for any dealership,” the company says on its website. “Luckily, 700Credit does the heavy lifting for you.”
That heavy lifting apparently means keeping consumers guessing.
When you call the number at the bottom of the letter (as I did), you’re connected with 700Credit’s adverse action line.
A recording says: “If you recently purchased a car from the dealership listed at the top of the letter, this letter is to inform you in writing that the dealership pulled your credit report. The rest of the letter does not apply to you.”
I tried about half a dozen times to get through to someone at 700Credit to ask about my situation. Each time, a service rep took my name and number and said someone would get right back to me.
Two weeks later, someone obviously reading from a script (maybe it was a robocall) left a message on my machine saying the letter was to inform me that the dealership pulled my credit report.
The dealer I bought my car from, Toyota Santa Monica, couldn’t shed much light on things.
“Oh, that letter?” said Gene Song, a finance manager. “Just ignore it. We get calls on that all the time.”
He said dealers use 700Credit to send out letters like that just in case someone gets miffed about a possible ding to their credit score as a result of a vehicle purchase.
“It’s a CYA thing,” Song said. (Google it if you don’t know what that means.)
I finally managed to reach Ken Hill, managing director of 700Credit, who explained to me that there are two scenarios that can trigger an adverse action notice.
First, a dealer pulls a customer’s credit file and then decides not to shop the loan around to lenders, probably because the customer is a bad credit risk.
Second, the dealer pulls a credit file and can’t get a loan from its main banks at the desired rate so it turns to alternative lenders, such as credit unions. Hill said this could be considered a counteroffer, which by law also would trigger an adverse action notice.
I pointed out that neither of those scenarios applied to me. He said I might have received the letter “in error.” He also said some dealers “send an adverse action notice to everyone.”
Toyota Santa Monica, for instance, seems to be one of those.
“All dealers have different policies about when a letter should be sent out,” Hill said, which is weird. The law should be the law.
I asked Hill why the letter from 700Credit doesn’t just say what he told me — that thing about the two scenarios. Why all the ambiguous language about possible credit troubles?
“The government dictates a lot of the language in the letter,” he replied.
In fact, the government specifies what information needs to be conveyed to consumers, but it doesn’t insist on exact language. It does provide sample letters, though, to show what it has in mind.
“The sample forms are illustrative and may not be appropriate for all creditors,” the Consumer Financial Protection Bureau says. “They were designed to include some of the factors that creditors most commonly consider. … A creditor may design its own notification forms.”
I asked Hill why, when a consumer calls 700Credit, there’s a recording that says the letter was generated solely because the dealer pulled your credit file and “the rest of the letter does not apply to you.”
He said he’d already answered that question. I told him he hadn’t.
Hill said I was being “argumentative” and that he had to go to a meeting. He said I could email him if I had anything else to share. Then he hung up.
Obviously this is not an acceptable business practice.
And how the heck did more than 9,600 dealers nationwide, according to 700Credit, sign up for a service that involves needlessly frightening customers? Do they honestly think all is made well by a phone recording that, in Emily Litella fashion, says, “Never mind”?
This is something that needs to be addressed in the relevant federal laws. But let’s not kid ourselves. The kindergarten that now is Congress won’t get anything done.
So state officials need to act. All notices of adverse action should specify, in plain language, why the letter was sent and whether action is required by the individual recipient.
The letter I received merely says that “if you have any questions regarding your credit score you should contact the consumer reporting agency.” It would be more helpful if instructions were provided for obtaining a free copy of your credit report, so you can see for yourself what the problem may be.
You can do that, by the way, by visiting AnnualCreditReport.com.
Go ahead, call me argumentative. Call me whatever you want.
CYA is never a good reason to scare the you-know-what out of consumers.