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Customer can sue car dealer for bait-and-switch lending tactics.

An automobile dealer may be a "creditor" under the Equal Credit Opportunity Act (ECOA), and therefore can be sued for misleading lending practices, the Seventh Circuit has ruled. The statute requires creditors to inform potential borrowers when their loan application has been denied and to explain the reasons. (Treadway v. Gateway Chevrolet Oldsmobile, Inc., 362 F. 3d 971, 975 (7th Cir 2004).)

"In recent years, a growing number of private attorneys are taking the time to sue auto dealers" for their lending practices, said John Sheldon, staff attorney with the National Consumer Law Center (NCLC) in Boston. "There are all kinds of statutes that these dealers are violating."

Tonja Treadway of Chicago received a direct-mail solicitation from local dealership Gateway Chevrolet Oldsmobile saying she was "preapproved" for financing to buy a car. (The dealership obtained her name from a list it bought of people who had recently filed for bankruptcy.) Treadway called the dealership and gave her Social Security number so Gateway could run a credit report. Although the dealership decided that she would not be eligible for financing and did not send her application to any outside lenders, it did invite her to visit its showroom.

During Treadway's October 2001 visit to look at a used car, Gateway did not tell her that it had not attempted to find financing. Instead, the dealership said it had found a bank that would finance a new car for her if she found a cosigner. Her godmother, Pearlie Smith, agreed to cosign, and the dealership quickly sent her the paperwork.

Smith did not notice that the papers named her as the primary noteholder--not as a cosigner for Treadway. Smith and Treadway realized the discrepancy when the first bill was sent directly to Smith. Treadway paid the first installment, but both women refused to make further payments, and the car was repossessed.

In December 2001, Treadway sued Gateway under the ECOA. Gateway maintained that since it merely arranges for credit with outside financial institutions, it cannot "deny" credit and cannot be held liable for failing to notify an applicant of its decision not to seek financing. The district court agreed and dismissed Treadway's claim in June 2003.

On appeal, the Seventh Circuit disagreed. "By unilaterally deciding not to send Treadway's application to any lender, Gateway effectively denied [her] credit," Senior Judge Richard Cudahy wrote for the court.

Quoting an earlier decision by a Missouri district court, Cudahy noted that a credit decision often involves several parties in "a continuum of participation .... At some point along the continuum, a party, becomes a creditor for purposes of the notification requirements of the act.'" (Bayard v. Behlmann Auto. Servs., Inc., 292 F. Supp. 2d 1181, 1186 (E.D. Mo. 2003).)

The notification requirements are not to be taken lightly, Cudahy added. In passing the ECOA, Congress stated two specific reasons why lenders must notify consumers: If creditors know they must explain their decisions, they will be less likely to discriminate; and a detailed explanation will help educate consumers as to how their credit status is deficient.

According to the NCLC, Treadway is the first appellate ruling to clarify how the ECOA's notice provisions apply to auto lending, and it will probably affect other types of consumer financing cases, including those involving abusive mortgage lending.
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Author:Jurand, Sara Hoffman
Date:Jul 1, 2004
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