The Bermuda Triangle of Fair Lending: Hot High-Interest Loan Issues

Lead Generation and

Adverse Action Notices

Annual ConferencePayday Loan Bar Association

November 13 – 15, 2013

What situation are we discussing?

• Consumers submit information to lead companies• Lead companies compare information to lender insertion orders• Usually, consumers satisfy various potential lenders’ insertion orders• Sometimes consumer won’t satisfy insertion orders of any lenders• Lead companies offer information to lenders in order based on bids• Lenders willing to pay the most get to see leads soonest• Lenders “peek” at information• Lenders review 3rd party information (sometimes consumer reports)• Lenders decide whether to purchase lead• Some lenders refrain from purchasing the lead• Some lender will pay to purchase the lead, based on the peek• After lead purchase, lender decides whether to extend credit

When are adverse action notices required?

• 4 Key considerations:– A “creditor” – shall notify an “applicant”– of “action taken” within 30 days

• After receiving “a completed application” • See:12 CFR § 1002.9.i.

Is this something less than an “application” such as an inquiry?

• Probably not a mere inquiry– For an “inquiry” - no application is received and no

denial notice is required • Generally means either:

– evaluation has not occurred, or– the creditor has not yet made any decision

about whether to grant credit• Official Staff Commentary to Regulation B §

1002.2(f)-3 to -5.

Does the regulation provide examples of “inquiries” that are not applications?

• Yes • Consumer asks about loan terms/rates

and creditor explains basic loan terms/rates/policies

• If consumer asks whether s/he qualifies, company offers to send an application

Without a full application, isn’t this rejecting pre-approval?

• Yes, but this requires a denial notice• When a creditor evaluates a consumer’s

creditworthiness and determines that he/she does not qualify for a preapproval, a standard adverse action notice should be provided

• Official Staff Commentary to Regulation B § 202.2(f)(5)-ii

If the application process isn’t complete, is a denial notice required?

• Yes• Notice of denial due to an incomplete

application is required 30 days after rejecting a consumer due to an incomplete application, unless the creditor uses the Model C-6 to request additional information from the consumer on an incomplete application

• Regulation B §1002.9(c)(1).

Is this a completed application?

• Maybe, but either way, notice required.• Written request for credit “made in accordance with procedures used

by a creditor for the type of credit requested”• Creditor has received all the information that the creditor regularly

obtains and considers in evaluating applications for the amount and type of credit requested

• Creditor:– Can establish its own application process and to decide the type and

amount of information it will require– must exercise reasonable diligence in obtaining such information

• Regulation B § 1002.2(f) and Commentary

If a consumer report is used, is an FCRA denial notice required?

• Yes• If any person takes any adverse action with

respect to any consumer that is based in whole or in part on any information contained in a consumer report, the person must provide oral, written, or electronic notice of the adverse action to the consumer

• 15 U.S.C. 1681m.

What if the consumer gets credit from one of many possible

lenders, via a broker?

• If the consumer gets credit, no denial notice needed• Considerations:

– When an “application” is made– on behalf of an “applicant” to– more than one “creditor” and the applicant – expressly “accepts or uses credit” offered by one of the

creditors– ECOA notification of action taken by any of the other

creditors is not required• Regulation B § 1002.9(g)

What if the broker won’t even forward the consumer info?

• Lead company must send a notice.• Lead Company Must Send an Adverse Action Notice to the Consumer

– Brokers deciding not to send application information to potential lenders are rejecting applications subject to FCRA and ECOA adverse action notice requirements

– Arrangers deciding not to submit the application to any lenders participate “in a credit decision” and are required to give notice of adverse action

• See the following:– Cochran v. Northeast Mortgage, LLC, 2007 WL 2412299 (D.Conn. August 21,

2007)– Treadway v. Gateway Chevrolet Oldsmobile Inc., 362 F. 3d 971 - Court of

Appeals, 7th Circuit 2004– Lacey v. William Chrysler Plymouth Inc., No. 02-C-7113, 2004 WL 415972, at

*5 (N.D. Ill. February 23, 2004).

If several lenders peek, but no one gets/takes a loan, then what?

• Creditor is responsible – can use 3rd party– If no credit is offered, each creditor taking adverse

action must provide a notice of adverse action, directly or through a third party.

– A notice given by a third party shall disclose the identity of each creditor on whose behalf the notice is given.

– Regulation B § 1002.9(g).

Can the lead company bundle one adverse action notice for everyone?

• Yes , but be specific. • One of the creditors or a non-creditor 3rd party can provide the notice. • If 1 notice is provided for multiple creditors, notice must:

– contain the name and address of each creditor– disclose either:

• the applicant's right to a statement of specific reasons within 30 days, or

• give the primary reasons each creditor relied upon in taking the adverse action—clearly indicating which reasons relate to which creditor

– Notice need not name each federal agency; disclosure of any one of them will suffice

• Official Staff Commentary to Regulation B § 1002.9(g)

What are the damages for violating the ECOA?

• Civil liability for actual and punitive damages in individual or class actions. • Violations also constitute violations of other federal laws. • Liability for punitive damages can be up to $10,000 in individual actions and the

lesser of $500,000 or 1 percent of the creditor's net worth in class actions.• Equitable and declaratory relief are also possible, as well as the costs and

reasonable attorney's fees to an aggrieved applicant in a successful action.• Criminal liability may result related to anyone who knowingly and willfully

violates such requirements.• Third-party notice—liability. When a notice is to be provided through a third

party, a creditor is not liable for an act or omission of the third party that constitutes a violation of the regulation if the creditor accurately and in a timely manner provided the third party with the information necessary for the notification and maintains reasonable procedures adapted to prevent such violations. Official Staff Commentary to Regulation B § 1002.9(g).

What are the damages for violating the FCRA?

• Willful Noncompliance = up to $1,000, Plus Punitive Damages, Costs, and Attorney’s Fees. If the Company’s noncompliance is willful, it will be liable for actual damages sustained by of not less than $100 and not more than $1,000; or for a natural person obtaining a consumer report under false pretenses (or knowingly without a permissible purpose), actual damages or $1,000, whichever is greater. Plus, this will result in punitive damages as a court may allow and the costs of the action together with reasonable attorney’s fees as determined by the court.

• Negligent Noncompliance = Actual Damage, Costs of the Action, and Attorney’s Fees. Negligent noncompliance can result in liability equal to (1) any actual damages; and the costs of the action together with reasonable attorney’s fees as determined by the court.

• Federal and State Agency Action. Federal and state agencies can also take action related to noncompliance, resulting in various costs to the Company, for example civil penalties of approximately $2,500 per violation.

• Criminal Liability. Criminal liability may result related to anyone who knowingly and willfully violates such requirements.

So what is the recap?

• Lead companies should send denial notice to “un-forwarded” consumers. Lead companies deciding not to submit a consumer’s information to any potential lender for a “peek” should furnish adverse action notices

• Give credit or a denial notice. Lenders “peeking at” leads (where no one provides credit) must ultimately provide:– credit– adverse action notice, or – a notice of incomplete application

• Carefully contract with lead companies to send your notice. Creditors can contract with third parties to send a bundled denial notice, when no creditor provides credit.

• Provide denial notice. Safest approach to prevent draconian legal penalties under the ECOA and FCRA, is to provide compliant adverse action notices

Questions & Answers

Questions?

Contact Information

Justin HosieHudson Cook, LLP6005 Century Oaks Dr.Chattanooga, TN 37416

423-490-7560 jhosie@hudco.com