Adverse action notices and Regulation B: Are you getting it right?

Delivering negative news is never fun. Delivering negative news while trying to ensure you are complying with various regulatory requirements is even less fun.

Some processes at your financial institution may have moved to the back burner or are no longer sufficient based on the changes experienced in 2020. As you look at revisiting processes in 2021, it is important to  review your adverse action notification and monitoring process to ensure you are complying with Regulation B.

We’ve included some areas for consideration under Regulation B regarding your adverse action process.

Timing is critical under Regulation B when adverse action is taken on a credit application. Once the financial institution has received a completed application, your clock starts ticking to ensure the applicant is provided with timely notification. It is important to note that the financial institution has flexibility in determining what defines a completed application, and including this definition your written policy or procedures may be beneficial in ensuring timing requirements are met. While not all-inclusive, the following are areas that cause confusion for financial institutions when complying with notification requirements under Regulation B.

A common misconception involves the right to receive a copy of the appraisal notice. Regulation B 1002.14(a)(2) requires a financial institution to provide the applicant with a notice of the right to receive a copy of the appraisal within three business days of application if the application received is to be secured by a first lien on a dwelling and an appraisal or evaluation was completed. The notice requirement applies to both consumer and commercial applications received.

Many have a preconceived notion that if action is taken on the loan within three business days, the notice is not required to be provided, like with Regulation Z and Regulation X required early disclosures. Please note, previously Regulation B did not provide an exclusion from providing the notice if adverse action was taken on the credit application within three business days.

In May 2020, the CFPB issued a fact sheet that included three questions to determine whether the application was a covered transaction triggering the notice requirement.

For example, if you received an application for credit to be secured by a first lien on a dwelling, but you had not completed an appraisal or evaluation in connection with the request before it was withdrawn or denied, the applicant would not be required to receive the notice of the right to receive a copy of the appraisal within three business days of application.

Conversely, if you received an application for credit to be secured by a first lien on a dwelling and you did obtain an evaluation or appraisal in connection with the transaction, the appraisal notice would be required even if the loan was denied or withdrawn within three business days.

It is important for management to ensure the notice of the right to receive a copy of the appraisal is incorporated to the loans-not-originated notification process for consumer and commercial applications when applicable.

Commercial loan applications can also cause confusion about when and how notification is required.

Regulation B 1002.9(a)(3) does allow altered notification requirements for commercial applications received with certain limitations. For simplicity sake, we are going to focus on notification requirements when a completed commercial application had been received by the financial institution. If the commercial applicant had gross annual revenues greater than $1 million in the prior fiscal year, your obligations are reduced to providing notice of adverse action within 30 days of receipt of a  completed application orally or in writing. Only if the applicant requests a written statement of specific reasons, after providing them notice orally, does the financial institution have to provide the applicant a written statement.

However, for your commercial applications when gross annual revenues are $1 million or less in the prior fiscal year, you have two options for ensuring you are complying with Regulation B. 

• The first option is to provide them written notification, as you would your consumer applications, that includes all notification requirements under Regulation B 1002.9(a)(2) and (b)(1) (a statement of action taken or a disclosure of the applicant’s right to a statement of specific reasons within 30 days if they request the reasons from the creditor within 60 days of notification, the financial institution’s name and address, the ECOA notice, and the name and address of the federal agency that administers compliance under Regulation B for your organization).  
• The alternative option is to provide them notification orally within a reasonable time of a completed application. (Thirty days is stated in commentary as being reasonable.) Take note: If you provide the notification orally, you are required to provide the disclosures referenced above (1002.9(a)(2) and (b)(1)) at the time of application regarding their rights for adverse action taken. 

There is also an exclusion under 1002.9(a)(3) for commercial applications received over the phone. If the application was entirely over the phone, the financial institution may provide an oral statement of action taken along with the applicant’s right to a statement of reasons for adverse action.

A financial institution has options to consider when handling commercial loan applications that are not originated. Consideration should be given to the individuals responsible for handling adverse action notification, current controls in place, and consistent procedures to reduce the potential for errors in complying with commercial loan application notification requirements.

Lastly, you want to make sure your financial institution has a process to monitor applications received across all channels and departments of the financial to ensure notification to applicants are occurring within the Regulation B 1002.9(a)(1) time frames. Communication has changed with branch closures, remote work, and disrupted schedules in 2020, creating challenges for everyone.

For example, if one of your lenders is unexpectedly out of the office for a period of time, do you have a process to capture pending applications received in person, over the phone, or via email/internet to ensure notifications are being provided on a timely basis? With the shift in communication channels, management should revisit their process for monitoring credit applications to identify potential gaps.

Regulation B focuses on ensuring the consumer is treated fairly and consistently when it comes to credit applications. Financial institutions are encouraged to review their adverse action process to ensure their notification and monitoring controls meet the intricate notification requirements of Regulation B and reflect the shift in communication.