When you deny a credit application or a deposit account request, you simply fill out a form and move on to the next customer, right? If only it were that simple! This article will clarify the who, what and why of the different requirements for denying loan applications and deposit requests for consumers and businesses and provide you with A BETTER WAY so you can get it right every time.
The Fair Credit Reporting Act (FCRA) requires creditors to give adverse action notices (AANs) to each consumer whose application has been denied in part due to the evaluation of their credit report. When furnishing an adverse action notice, two factors must be present: (1) the creditor acquired the consumer’s credit report, and (2) the creditor took adverse action based on information contained within the consumer’s credit report. Simple, right? However, that is not the only regulation we must comply with – now Regulation B emerges.
Regulation B, formally known as the Equal Credit Opportunity Act (ECOA), requires creditors to provide applicants with AANs when they are denied consumer credit whether or not a consumer report is used. The notice requirements do not depend on using a consumer credit report. Not so simple.
Simply stated, both FCRA and ECOA may require an AAN but differ on what triggers the notice. Here is a quick reference:
|Adverse Action||ECOA/Reg B||FCRA|
|Application for credit with no consumer report||YES||NA|
|Application for credit with a consumer report||YES||YES|
|Application for deposit account without credit features||NA||YES|
|Application for deposit account with credit features||YES||YES|
What Is an Adverse Action?
Under FCRA, a consumer is an “individual.” An adverse action is a decision or action taken against a consumer that is adverse to the consumer’s interests and is influenced either wholly or partially by information contained in a consumer report. If no consumer report is obtained, there is no requirement under FCRA to give an AAN.
Under ECOA/REG B, a consumer is a “natural person” or a “non-natural person” such as corporation, trust, partnership or joint venture. An adverse action is:
- A refusal to grant credit in substantially the amount or terms requested; or
- A termination or an unfavorable change in the terms of an account that does not affect all or substantially all of the account types; or
- A refusal to increase the amount of credit available to an applicant who has applied for an increase; or
- A counteroffer that is not accepted.
Who is Entitled to an Adverse Action notice?
Under FCRA, if information from a consumer report played a role in the adverse action for an individual, a separate notice must be sent to each applicant (individual). For accounts with multiple individuals, no applicant shall receive information about the other applicant’s consumer report. Adverse Action notices are not required for guarantors or co-signers.
Under ECOA/REG B, if the applicant is a natural person, notice goes to that person. If joint applicants are involved, the notice must be sent to the primary applicant. If the applicant is not a natural person (i.e., corporation, trust, partnership or joint venture), the notice should be directed to the entity that applied. Adverse Action notices are not required for guarantors or co-signers.
When is the Adverse Action Notice given?
Under FCRA, there is no timeframe for providing the AAN. Notice within 30 days (as required by Regulation B) would be deemed reasonable.
Under ECOA/REG B, it depends on whether credit is denied or there is a counteroffer:
If credit was denied, you must provide the AAN within 30 days after:
- Receiving a completed application; or
- Taking adverse action on an incomplete application (unless a notice of incompleteness is provided); or
- Taking adverse action on an existing account.
If a counteroffer is made, the alternative terms may be communicated verbally or in writing; alternatively, ECOA provides a combined AAN and counteroffer form that may also be used. If given separately and the applicant does not accept the counteroffer within 90 days, you must give an AAN. If the applicant accepts the counteroffer and the loan is closed based on those alternative terms, no additional notice is required.
Within 30 days of receiving a completed application, you may give a combined counteroffer/AAN and, if the applicant does not accept the counteroffer, you have no additional notice requirements.
Requirements for Denying Deposit Accounts
Often certain reports are obtained from Consumer Reporting Agencies (CRAs) when consumers apply for deposit accounts (i.e., ChexSystems, eFunds, etc.) and may require an AAN if the account is denied. If the decision to deny the account is based on a credit score or scoring model, an AAN will be required, too. Remember, under FCRA, if adverse action is taken with respect to a consumer “that is based in whole or in part on any information contained in a consumer report” the Bank must provide oral, written or electronic notice of the adverse action to the consumer and provide a written or electronic disclosure of a numerical credit score used in taking any adverse action based in whole or in part on any information in a consumer report.
If the credit reporting agency provides you with a recommendation (Open, Deny, etc.), it is probably based on some scoring model. For a Deny, it should be treated as a report that contains a credit score for purposes of whether to provide an adverse action notice. Most vendors provide sample language for accurately communicating the denial to the consumer; for example, “We regret we cannot open your account today. In evaluating your application, the following consumer reporting agency/agencies provided us with information that in whole or in part influenced our decision. These agencies did not make the decision to disapprove your account application and are unable to provide you with specific reasons why the decision was made.”
If the deposit account is denied solely on the financial institution’s prior transactional experience with the consumer and no information is obtained from a credit reporting agency and you are relying solely on your own experience, no notice is required.
Information Required for Adverse Action Notices
FCRA – Consumer Notices (Applications for Credit or Deposit Accounts where a consumer report is used):
If the denial was based in whole or in part on information taken from a consumer report, include:
- A statement that the adverse decision was based on information in a consumer report;
- Up to four key factors that adversely affected the consumer’s credit score. You may include a fifth factor if the number of inquiries made is a key factor;
- The name, address and toll-free number of the Credit Reporting Agency (CRA) that supplied the report;
- A statement that the consumer reporting agency did not make the decision and cannot provide the reasons why the action was taken;
- A statement that the consumer has the right to obtain a free copy of the report from that agency if a request is submitted to the agency that supplied the report within 60 days of the consumer receiving the AAN and a statement of the consumer’s right to dispute the accuracy or completeness of the report.
FCRA – Businesses
Under FCRA, notices to businesses are not required. Businesses do not have consumer reports. However, in the event there is an application for a business account in which one or more of the applicants is a natural person, we will follow the rules for both a business and natural person. In the case where credit is denied based on information contained in the natural person’s credit report, the business will receive an adverse action under Regulation B. The natural person must also receive an adverse action notice which contains the information as required under FCRA.
ECOA/Reg B – Consumer Notices (Applications for Credit with or without a consumer report and Deposit Accounts with credit features where a consumer report is used). ECOA/Reg B does not apply to applications for deposit accounts where there is no credit feature.
- A statement of the action taken (i.e., that the request has been denied or conditioned);
- The creditor’s name and address;
- A statement of the provisions of ECOA: “The federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract), because all or part of the applicant’s income derives from any public assistance program, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The federal agency that administers compliance with this law concerning this creditor is [name and address of the appropriate agency listed in Appendix A of Regulation B(1)”, and either:
- A statement of specific reasons for the action taken (number of reasons is not specified but should be no more than four); or
- A disclosure of the applicant’s right to a statement of specific reasons within 30 days, if the statement is requested within 60 days of the creditor’s notification.
ECOA/Reg B – Business Notices Under Reg B, business credit refers to extensions of credit primarily for business or commercial (including agricultural) purposes but excludes certain extensions of credit described such as public utility, securities, incidental or government credit, see §1002.3(a)-(d).
Business Applicants with gross annual revenues of $1 million or less:
- Follow the consumer requirements; or
- Give the applicant a written disclosure at the time of application describing the right to receive written reasons for the denial upon request; and
- Then provide oral notice of the denial at the time of action. (The Bank should document oral notifications).
Business Applicants with gross annual revenues over $1 million:
- Provide notice orally (document this) or in writing within a reasonable time of action taken. If the applicant makes a written request for denial reasons, provide them along with the ECOA notice within 60 days of the creditor’s notification.
FCRA: There are no record retention requirements specified; FCRA follows Reg B’s requirements for retention of AANs.
ECOA/Reg B: Adverse Actions on consumer applications must be retained for at least 25 months after the adverse action is taken and for at least 12 months after the action is taken on business applications.
Financial institutions should develop written procedures to address when and how adverse action notices are to be completed and provide ongoing training and monitoring to ensure that these are completed correctly.
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(1) Banks, Savings Associations and Credit Unions with Total Assets over $10 billion and their affiliates: Bureau of Consumer Financial Protection; National Banks: Office of the Comptroller of the Currency; Federal Credit Unions: NCUA, Office of Consumer Protection, Division of Consumer Compliance and Outreach; State Member Banks: Federal Reserve Consumer Help Center; Nonmember Insured Banks: FDIC Consumer Response Center