Let’s Talk about Adverse Action
How many times have you thought to yourself, is an adverse action notice necessary? Sometimes it may seem clear as day and other times a little grey. The Compliance Team at America’s Credit Unions regularly receives questions regarding whether an adverse action notice is necessary. Please note that Regulation B of the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA) both discuss adverse action requirements, however, this blog is only focused on the adverse action notice under Regulation B.
Section 1002.9(a) of Regulation B defines adverse action as a denial of credit, account termination or unfavorable account term change. Simply, Regulation B requires an adverse action notice typically anytime a credit union takes “adverse action” against a member after receiving a “completed application.”
Adverse action is defined under section 1002.2(c)(1) as:
“(i) A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered;
(ii) A termination of an account or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor's accounts; or
(iii) A refusal to increase the amount of credit available to an applicant who has made an application for an increase.”
Paragraph (c)(2) provides what the term does not include stating:
“(i) A change in the terms of an account expressly agreed to by an applicant;
(ii) Any action or forbearance relating to an account taken in connection with inactivity, default, or delinquency as to that account;
(iii) A refusal or failure to authorize an account transaction at point of sale or loan, except when the refusal is a termination or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor's accounts, or when the refusal is a denial of an application for an increase in the amount of credit available under the account;
(iv) A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested; or
(v) A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested.”
Based on these definitions above, if a member applies for an extension of credit and the credit union denied the application for credit, it will constitute an adverse action. Similarly, if a member requests an increase to their credit limit on an existing account and the credit union denied the request, it will also constitute an adverse action. Below are some examples of bases for adverse action.
• Incomplete application (applicant did not provide all requested information);
• Insufficient credit references (applicant did not provide enough credit references, or the references were unacceptable or unverifiable);
• Employment issues (temporary, irregular or unverifiable); or
• Credit history (poor or insufficient).
Please note that a compliance blog will be forthcoming next week which will provide more details on the bases for denials.
But how do you know if you have a completed application? Section 1002.2(f), defines an application as “an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested.”
Comment 6 in the commentary to the section explains what a completed application is and includes an example stating:
“The regulation defines a completed application in terms that give a creditor the latitude to establish its own information requirements. Nevertheless, the creditor must act with reasonable diligence to collect information needed to complete the application. For example, the creditor should request information from third parties, such as a credit report, promptly after receiving the application. If additional information is needed from the applicant, such as an address or a telephone number to verify employment, the creditor should contact the applicant promptly.”
This means that an application or completed application for one credit union may differ from another credit union based on their individual practices and procedures. In other words, it will depend on whether the initial information collected meets the credit union’s internal criteria for a completed application and a credit union has enough information to make a credit decision.
Ultimately, one of the primary triggers for an adverse action notice under Regulation B is the act of taking adverse action on a completed application. Please note that section 1002.9(a)(1) may also require notification in other situations such as taking adverse action on an existing account, incomplete applications, or counteroffers. Section 1002.9 requires a credit union to notify the applicant within 30 days of receiving a completed application as to whether the application is approved, denied or a counteroffer is made. Upon receipt of a completed application, an adverse action notice would be required under Regulation B if the credit union denied the completed application for credit. However, it is important to note that if a member expressly withdraws a credit application before the credit union has had an opportunity to deny the application, the creditor is not required to comply with the notification requirements under section 1002.9.
[For your convenience, the CFPB has provided sample adverse action statements. The statement must be specific and indicate the main reason(s) for the adverse action. The statement also must accurately describe the factors considered for the denial. Note that you may need to modify the sample statement or supplement it with explanatory information.]
Questions? Please reach out to the Compliance Team at compliance@americascreditunions.org.
Click here to view the latest compliance calendar below for important upcoming dates and deadlines for credit union regulatory compliance requirements.