Credit Score Information on Adverse Action Notices

Written by Steve Van Beek

Last Wednesday, the Federal Reserve released final rules on both risk-based pricing notices and adverse action notices.  Both changes were required by Section 1100F of Dodd-Frank.  

Adverse Action Notices

There is a bit of confusion in this area because there are actually two separate adverse action notices.  Regulation B has an adverse action notice.  And, the Fair Credit Reporting Act (FCRA) also has a requirement for an adverse action notice.  Oftentimes, credit unions are required to send both notices and they meet this requirement by sending a combined Reg B/FCRA adverse action notice.  In some other situations, only the Reg B adverse action notice is required (i.e., no credit report is used).

The Dodd-Frank Act changed the FCRA adverse action notice.  Of note, there is not a regulation that implements the FCRA adverse action notice.  Rather, the Federal Reserve provides combined model forms in Regulation B that provide the required language for both the Reg B and the FCRA adverse action notices.

And, that is why the Fed amended Reg B even though Section 1100F of Dodd-Frank made a change to the FCRA adverse action notice.

Adverse Action.  The trigger for the FCRA adverse action notice is when the CU takes adverse action based "in whole or in part" on information from a consumer report.  With the new changes - the FCRA adverse action will need to also include the credit score information if the CU used the credit score in taking adverse action against the member.  

What if the CU did not use a credit score?  From the Fed - Page 6-7:

"Under Section 1100F of the Dodd-Frank Act, a person is not required to disclose a credit score and related information if a credit score is not used in taking the adverse action."

Similar to the risk-based pricing rule, if the CU obtains a credit score it would need to be able to demonstrate that the credit score played no role in the adverse action determination.  Quite a tough hurdle.     

What if there is no credit score?  From Page 7:

"Disclosure that no credit score is available. In some cases, a creditor may try to obtain a credit score for an applicant, but the applicant may have insufficient credit history for the consumer reporting agency to generate a credit score. One commenter asked that the creditor have the option to provide the applicant notice that no credit score was available from a consumer reporting agency in the space available for the credit information disclosure.

Section 1100F only applies when a creditor uses a credit score in taking adverse action. The creditor cannot disclose credit score information if an applicant has no credit score. Nothing in section 1100F of the Dodd-Frank Act prevents a creditor, however, from providing the applicant notice that no credit score was available from a consumer reporting agency, although section 1100F does not require such notice."

Specific Reasons (Reg B) and Key Factors (FCRA).  If the credit union is required to send both adverse action notices, it cannot use the FCRA "key factors" in the credit score information to fulfill the Reg B requirement for specific reasons for the adverse action.  The Fed spelled this out in Page 8:

"As explained in the proposed rule, the Board recognizes that a key factor(s) that adversely affected the consumer’s credit score may be the same as a specific reason(s) for denying credit or taking other adverse action. However, some specific reasons for taking adverse action may be unrelated to a consumer’s credit score, such as reasons related to the consumer’s income, employment, or residency. Therefore, the Board continues to believe the disclosure of both the key factors that adversely affected the consumer’s credit score and the specific reasons for denying credit or taking other adverse action is necessary to fulfill the separate requirements of the ECOA and the FCRA. The Board believes providing separate lists, and thus distinguishing factors that adversely affected the credit score from reasons for the adverse action determination, will be more useful and clearer for consumers."

Credit Score Information on Separate Document?  Unlike the risk-based pricing rule - which allows credit unions to staple the new credit score information to their existing RBPN - the Fed has indicated the credit score information needs to included on the adverse action notice.  A few industry commenters had asked that institutions be able to attach a form from a consumer reporting agency to their existing adverse action notices.  The Fed declined stating that "providing a form with credit score information separately from an adverse action notice does not appear to be consistent with the legislation."  

My Soapbox:  Basically, commonsense was thrown out the window and the Fed was not concerned with regulatory burden or compliance costs.  I'm not sure there is another explanation.  I'm pretty confident that the Fed could have used its regulatory authority to determine the adverse action notice is now a two-page disclosure (with the second page being the credit score information).  Just like they did with the risk-based pricing notice.  Which was written by the same attorneys......  

Timing.  Similar to the risk-based pricing notices, the Fed stated the new requirements of Dodd-Frank become effective July 21, 2011.  Credit unions should do their best to meet the July 21, 2011 deadline.  

Comments

[Nichol Bodden]

What happens when an appraisal comes in low on a purchase changing the LTV but the loan still fits the lenders guidelines? Should a counter-offer be given (albeit there is a mortgage contingency in the contract). If the counter offer is rejected, does the lender then issue a declination.

[Steve Van Beek]

Nichol,
Unfortunately, I don't think we'll be able to help with your question. It looks like a good one to run by your attorney.

Of course, if your credit union is a NAFCU member - feel free to send questions to our email address: compliance@nafcu.org