Adverse action notices are so common in lending that many errors tend to escape unnoticed. Reviewing Regulation B, which implements the Equal Credit Opportunity Act (ECOA), particularly Section 1002.9, will help you understand most requirements surrounding adverse action notices. Additional requirements can be found in Section 615 of the Fair Credit Reporting Act (FCRA) and must be followed to comply with federal regulations.
Common Adverse Action Errors
The Anders Banking and Financial Institutions team hosted a webinar, Steer Clear of These Common Errors in Adverse Action and Loan Servicing. Partner and compliance and loan review practice leader Brad Stumpe, CPA, CRCM and compliance manager Sadie Carrera, CRCM shared actionable tips to help reduce adverse action errors as well as minimize loan servicing errors.
Co-applicant Not Receiving the Notice
A common error is the co-applicant not receiving the adverse action notice when they should. While Reg B requires notice only to the primary applicant, usually the first applicant listed on the application. FCRA requires notice to any consumer against whom adverse action is taken based on information in their consumer report. This means that if information in the co-applicant’s consumer report contributes to the decision to deny the request, then the co-applicant should also receive a notice of adverse action.
Untimely Notice
When does the 30-day clock start ticking? It starts when you receive a completed application. Defining what constitutes a completed application is crucial. Some community banks may not have a policy at all, whereas larger institutions might have a policy that is not consistently applied. You must document when you receive a complete application to help track the 30-day period.
According to Reg B, a creditor must exercise reasonable diligence in obtaining the applicant’s information, so if you ordered the appraisal in a timely manner, then you can consider the date the appraisal was received as the date that you had a complete application. These extensions aren’t unlimited and may be contingent on other circumstances. For instance, if an applicant’s credit history is borderline but could be salvaged by a strong loan-to-value (LTV) ratio, it makes sense to wait for the appraisal. If the credit history was so poor that it would result in a denial regardless of the LTV, holding the adverse action notice for more than 30 days is more difficult to justify.
Incomplete Application
If an application is incomplete because the applicant hasn’t provided everything you requested, you can send an adverse action notice at the 30-day mark. It might say, “We are denying this request because of an incomplete application.” This closes the file, just like denying the application due to poor credit history or low LTV.
Alternatively, you can send a notice of incompleteness, which keeps the credit request open beyond 30 days. This must be in writing and include specific required elements. Sample form C6 in Appendix C of Regulation B provides an example. If the applicant doesn’t provide the requested information by the specified time, you have no further obligations. The notice of incompleteness should include:
- A list of the specific information that is needed.
- A reasonable period of time for the applicant to provide the missing information, usually 30 days is sufficient
- A statement that failure to provide the requested information will result in no further consideration being given to the application
There is no “Option 3” to do nothing and continue waiting for the applicant to provide the data.
Counteroffers
How do you treat an unaccepted counteroffer? The correct answer is to treat them as a denied application. For example, if an applicant asks for a $100,000 loan and your institution approves a loan for $75,000, but he doesn’t accept it, you’ve essentially denied his $100,000 request.
There are two options with counteroffers:
- Send combined counteroffer and adverse action notice: If the applicant doesn’t accept this offer, there’s nothing more you have to do. Model form C4 from Appendix C of Regulation B provides an example. The notice must include:
- Standard adverse action notice for the original request
- Terms of the counteroffer
- The date by which the counteroffer must be accepted
- How the applicant can accept the counteroffer
- Make a counteroffer without denying the original request: If accepted, no further actions are required other than closing the loan. If the counteroffer is rejected, send a normal adverse action notice within 90 days of making it.
Reason for Denial
The adverse action notice must clearly explain why the applicant was denied, where the information came from and who the applicant can contact if they believe the information is incorrect or they’ve been discriminated against. Ensure the reasons for denial match the file. When adding the reason for denial in the adverse action notice, keep the following in mind:
- More than four reasons are not considered helpful to the applicant. Pick the four primary reasons.
- Lack of collateral should not be the reason for denying an application for unsecured credit. Specify why they don’t qualify for unsecured credit.
- Disclosing an insufficient credit score isn’t specific enough. Provide more actionable items.
- The “other” box should have guidelines and parameters to avoid inappropriate, insufficient, or discriminatory reasons.
Consumer Reporting Agencies (CRA) Information
There are differences in who should receive an adverse action notice under ECOA and FCRA. Both rules work together regarding the content of adverse action notices. The CRA information is required by the FCRA.
- When information from a CRA was used to deny the credit request, list the original source of the consumer report and ensure contact information is correct.
- For credit score information, list the CRA that provided the credit score and include the four factors that most adversely impacted the credit score. This can be different from the CRA that provided the consumer report.
Be sure you’re using current and accurate information for the federal agency that administers compliance with Reg B for your institution. This can be found in Appendix A to Regulation B.
Commercial Denials
If gross annual revenues (GAR) are $1 million or less, the rules are similar to those for consumer credit and most institutions will treat the request as a consumer deal for ease of compliance. Reg B states that the statement of action taken may be given orally or in writing. If allowing for oral notification, document the conversation since you’re still subject to timing and record retention rules.
If you opt to disclose the business applicant’s right to a statement of specific reasons at the time of application rather than providing an adverse action notice when applicable, it is important to include the name, address and phone number of the person or office at your institution that can provide the specific reasons, along with the correct federal agency to contact if they believe they’ve been discriminated against. Ensure that any notice is in a form the applicant can keep.
By addressing these common errors and following the appropriate regulations, financial institutions can better manage adverse action notices and maintain compliance with federal requirements.
Anders Banking and Financial Institution advisors work within the banking and lending industry to help clients comply with multiple federal regulations. To learn more about what we can do for your institution, and the associated costs, request a meeting with an advisor below.
