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Do your adverse action notices meet compliance requirements?

Mar 29, 2023

The regulations establishing adverse action notice requirements related to credit score disclosures have remained the same since 2011’s model form update under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Still, errors in the completion of adverse action notices persist at a high level.

The Equal Credit Opportunity Act (ECOA)/Regulation B and the Fair Credit Reporting Act (FCRA)/Regulation V serve the dual purposes of consumer protection and consumer education. Both have specific disclosure requirements when credit cannot be extended to an applicant under the requested terms. While ECOA and Regulation B protect an applicant against unlawful discrimination, FCRA and Regulation V protect the consumer’s credit profile.

Let’s break down the content requirements by regulation:

Regulation B

For consumer applications, the boxes to check under ECOA and Regulation B include:

  • A written statement of actual and specific reasons for the adverse action or, if not providing the specific reason within the written notice, a statement that the applicant has a right to receive the specific reason for adverse action if requested within 60 days of the notification.
  • The ECOA disclosure notice as contained in §1002.9(b)(1) or a substantially similar notice.
  • The name and address of the agency overseeing the institution’s compliance with ECOA/Regulation B.

Errors often come up in listing the specific reasons for denial. In some cases, the consumer not passing the criteria in an internal scoring system is listed as the reason for denial. Because consumers are unaware of what goes into an internal scoring system, the rules state that the underlying reasons for why the applicant didn’t meet the requirements need to be listed.

Guidance for regulators

The Consumer Financial Protection Bureau (CFPB) recently issued Circular 2022-03 to guide regulators in the consistent enforcement of consumer protection laws. This publication targeted adverse action notice requirements set forth under ECOA/Regulation B. The circular is essentially advising creditors and regulators to ensure the specific reasons for adverse action are identified on the adverse action notices, even if complex algrorithms and artificial intelligence are used within automated underwriting systems making it difficult for the consumers to understand the real reasons for denial.

At the end of the day, the creditor is responsible for ensuring that the decision-making process of any automated system is fair and equitable to all. The circular states that if the creditor is unable to determine the principal reasons of denial because they don’t understand the complex algorithms in play, the system should not be used.

ECOA notification requirements

The ECOA also requires notifications be provided to the applicant within 30 days of receipt of a completed application, taking adverse action on an incomplete application or taking adverse action on an existing account, and within 90 days of notifying the applicant of a counteroffer if the applicant does not expressely accept the counteroffer.

If information needed to make a credit decision is not obtained within 30 days, an incomplete letter meeting the requirements within Regulation B or a denial for incompleteness must be provided. Once enough information is received to make a credit decision, the creditor has 30 days to send a notification of denial. For example, if income verification is returned with an income lower than needed to approve the loan, the creditor has 30 days from receipt of the verification to send an adverse action notice.

Applications are often marked withdrawn, when in fact, they should be considered denied. When a creditor cannot provide credit under the terms applied for and the applicant does not accept any counteroffer provided, the application is considered denied. A lender’s notes stating the appraisal came in too low and the applicant withdrew should generally be considered a denial of the loan amount applied for.

Regulation V compliance

Compliance with the Regulation V disclosure requirements is required when adverse action is taken based on information contained in the applicant’s credit report and is specific to the credit report used in establishing eligibility for credit for personal, family or household purposes.

The FCRA and Regulation V require disclosures of:

  • A statement that the credit decision was made in whole or in part on information contained in a credit report and the credit reporting agency was not involved in the credit-making decision and cannot provide information as to reason for the decision.
  • A statement of the applicant’s right to request a free copy of their credit report from the credit reporting agency supplying the credit information.
  • A statement that the free copy of the credit report must be requested within 60 days of the notice.
  • A statement that the applicant may dispute the accuracy and completeness of the credit report directly with the credit reporting agency.
  • A statement that credit information was obtained from an affiliate or from an outside source other than a consumer reporting agency and that the consumer can make a written request within 60 days after receipt of the notice for disclosure of the nature of the information.
  • The applicant’s credit score used in arriving at the credit determination and the reasons the score is not higher.
  • The name, address and a toll-free telephone number of the credit reporting agency furnishing the credit information.

If the reason for taking adverse action is not based upon information contained in a credit report, the adverse action notice should not be marked to state that a credit report was obtained and the the credit score information should not be listed. For example, if the reason for denial is only related to the value of the collateral, the FCRA/Regulation V boxes should not be checked.

The name and address of the credit reporting agency providing the consumer credit report should be included when the denial is based on information from a consumer report. In some cases, the creditor obtains the consumer report from a consumer reporting agency other than TransUnion, Experian or Equifax, and in those cases, the consumer reporting agency that provided the credit report should be listed.

The credit score and the reasons the credit score is not higher must be included on adverse action notices if the credit score was used in the adverse action determination, even if it was not a significant factor in the decision.

Keep in mind that guarantors and co-signers do not receive adverse action notices. Therefore, the credit scores of guarantors or co-signers should not be listed on the applicant’s adverse action notice.

How Wipfli can help

Credit applicants have the right to know precisely why their request could not be granted. Wipfli professionals can address any questions or concerns that arise for financial institutions in the review process. It is essential to avoid errors when providing applicants with an understanding of the steps that can be taken to improve creditworthiness. Our team is ready to provide guidance on best practices to help your organization achieve its goals.

Contact us today to learn more.

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Lisa Lenhard, CUCE, BSACS
Senior Compliance Consultant
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