With the emphasis on making new loans, it’s easy for errors to be made on loans that were not originated. From determining whether an application was withdrawn, incomplete or denied to completing an accurate and timely adverse action notice, there are a lot of pieces that could result in errors.
Failure to provide a notice within the required timeframe is a common error, particularly for applications that are incomplete or where a counteroffer has been made. The timing requirements for adverse action notices are governed by Regulation B. Under the regulation, a creditor is required to notify the applicant of adverse action within:
- Thirty days of receiving a complete credit application.
- Thirty days after receiving an incomplete credit application.
- Thirty days after taking action on an existing credit account.
- Ninety days after making a counteroffer on an application for credit if the applicant does not accept the offer.
Financial institutions should ensure they have a pipeline in place so all applications are handled within the required time frames.
Another frequent error is neglecting to send an adverse action notice because the application was incorrectly considered withdrawn.
While an adverse action notice is not required for withdrawn applications, the applicant must expressly withdraw the application. This means the applicant needs to tell the lender they wish to withdraw their application.
Sometimes a lender will consider an application withdrawn because the applicant has not responded to contact attempts.
If the application is not expressly withdrawn, it cannot be considered withdrawn. If the creditor cannot make a loan decision because additional information is needed, the options are to (1) deny the loan for incompleteness and provide an adverse action notice within 30 days of application or (2) provide a notice of incompleteness informing the applicant that additional information is needed within 30 days of application.
If a notice of incompleteness is used, the notice should include the information needed, a deadline for the applicant to provide the missing information and inform the applicant their application will no longer be considered if the information is not received by the deadline. If the information is not received by the deadline, the lender may consider the application closed for incompleteness and no further notice is required.
In addition to considering applications withdrawn because they are incomplete, we also see errors because lenders consider an application withdrawn when it was actually denied. This frequently happens with counteroffers that are not accepted.
For example, a consumer submits an application for a fixed rate loan with a 30-year term. After the lender reviews the written application and pulls a credit report, they determine the applicant’s credit score does not meet minimum requirements for this loan product; however, they could qualify for an ARM loan with a 20-year term. The lender contacts the applicant, informs them they do not qualify for the fixed rate loan, but would qualify for an ARM. If the applicant does not accept the ARM loan, the application is denied and an adverse action notice would be required based on the information in the original application. This is because the applicant did not qualify for the original terms applied for and did not accept the counteroffer.
We also find financial institutions will often neglect to provide an adverse action notice for business purpose loans because they forget that Regulation B applies to both consumer and business purpose loans. The notice requirements for businesses with gross revenues of
$1 million or less are similar to the requirements for consumers.
In addition to Regulation B, the Fair Credit Reporting Act (FCRA) also has requirements for adverse action notices.
It requires providing information about the credit reporting agency used in the credit decision. If an application is denied wholly or in part based on information received from a credit bureau, the name, address and phone number of the credit bureau is required to be included on the adverse action notice.
Common errors include disclosing this information when the denial was not based on information obtained from a credit bureau, such as applications denied due to collateral values or length of employment or not including this information when it is required.
Another common error involves reporting the incorrect credit reporting agency (CRA) on the adverse action notice. The requirement is to provide the contact information for the CRA the credit information was obtained from; however, this is not so simple when the credit reporting information was obtained from a reseller, such as Kroll Factual, CBC Innovis or others. Because a reseller of consumer reports is considered a CRA, the name of the reseller should be disclosed.
Although errors are common, all is not lost. Providing training on Regulation B and the FCRA to all lenders and lending staff and implementing a process for a secondary review of all withdrawals and denials will assist you in strengthening your compliance management system.