Written by Steve Van Beek
A couple of weeks ago we looked at the Philadelphia Federal Reserve's Consumer Compliance Outlook and we later looked at the spousal signature issue under Regulation B. Today, we've included another common compliance violation as identified by the Federal Reserve in their examinations.
"Consumer Credit Adverse Action Notices
When a creditor takes adverse action — as defined in §1002.2(c) — on a consumer credit application or existing consumer account, the creditor is required by §1002.9(a)(2) to provide a written adverse action notice that discloses the action taken by the financial institution, the name and address of the institution, the ECOA anti-discrimination notice in §1002.9(b)(1), the name and address of the institution’s regulator, and either the specific reasons for the adverse action or a disclosure of the right to obtain the specific reasons and the contact information to obtain them. Examiners noted common violations for two of the adverse action notice requirements: failing to list the statement of reasons for the action taken, and providing reasons for the action taken that are not specific enough.
The statement of reasons must indicate the principal reasons for the adverse action, which “must relate to and accurately describe the factors actually considered or scored by a creditor.” See comment 1002.9(b)(2)-2. The number of reasons should not exceed four because more than four will likely not be meaningful to the applicant.
General explanations such as “credit score below bank policy” or “outside of risk tolerance” are not specific enough and should not be used. Sample Form C-1 found in Appendix C to Part 1002 contains a list of 23 “Principal Reason(s) for Credit Denial, Termination, or Other Action Taken Concerning Credit” and includes a 24th option for “Other, specify.” If the reasons for taking adverse action are not included in Sample Notice C-1, such as “inadequate down payment” or “no deposit relationship with us,” those can be included. Simply picking the closest identifiable factor listed is not sufficient.
Some best practices for adverse action notices include providing a second-level review of notices. For commercial loans, if the creditor discloses the action taken orally, it should make a contemporaneous notation of the call in its file to demonstrate compliance.
Since adverse action notices are often prepared by internal software or third-party programs, the software must reflect current regulatory requirements. If the software an institution uses for creating adverse action notices uses drop-down menus, options that are too vague should be removed. For example, instead of stating “credit score too low,” address the reasons behind the low credit score, such as “limited credit experience” or “delinquent past or present obligations with others.” Since the purpose of the notice is to tell the applicant why the application was denied, the reason specified should be clear to the applicant. Finally, as with spousal signature violations, adverse action notice violations can trigger file searches for other affected applicants and require the institution to take corrective action for the affected parties." (links and emphasis added).
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The full 1st Quarter issue of Consumer Compliance Outlook is available here.
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