Adverse Action Notices

In this article, Laurie Jorgensen discusses the requirements for adverse action notices.

Regulation B governs when an adverse action notice is required and what must be included. In recent audits, we have found few exceptions involving missing notices or failure to provide notices to consumers. However, we continue to see numerous exceptions related to the reasons provided for denial. The regulation and regulatory agency expectations are clear – the reason for denial must be specific. (12 CFR 1002.9(a)(2)(i) and (b)(2))

Common reasons for denial include limited credit history, negative information obtained from a credit report, recent bankruptcy, high utilization of unsecured credit, high debt-to-income ratio, insufficient income, and unverifiable income. These examples appear on the model notices provided in Regulation B.  (12 CFR 1002, Appendix C).

12 CFR 1002.9(b)(2) states: (2) Statement of specific reasons. The statement of reasons for adverse action required by paragraph (a)(2)(i) of this section must be specific and indicate the principal reason(s) for the adverse action. Statements that the adverse action was based on the creditor’s internal standards or policies or that the applicant, joint applicant, or similar party failed to achieve a qualifying score on the creditor’s credit scoring system are insufficient. When you step back and look at this, you can understand why non-specific reasons may be confusing to a consumer.

One exception we repeatedly identify during bank and credit union audits is the use of such reasons as:

• “We do not grant credit under the terms requested.”
• “We do not offer terms and conditions requested.”

While these statements make sense internally, they often provide little helpful information to the consumer.

For example, a consumer may apply for a HELOC at a bank or credit union that offers HELOC products. If the application is denied because the property is an investment property and the institution does not offer HELOCs on investment properties, that should be stated clearly on the adverse action notice. A specific explanation allows the consumer to understand exactly why the loan was denied.

Other examples of specific reasons may include:

• “The institution does not finance manufactured homes located in mobile home parks;” for an application where credit was to purchase a manufactured home to be located in a mobile home park and the institution does not lend in those situations.
• “The institution does not offer HELOCs secured by manufactured homes;” if your bank or credit union does not offer HELOCs for manufactured homes.
• “The institution does not provide vehicle loans for automobiles more than 15 years old;” if your bank or credit union does not provide vehicle loans over 15 years old.

Similarly, banks and credit unions should avoid stating the credit score does not meet the institution’s underwriting policies. A more specific explanation would be: ”A minimum credit score of 620 is required for this loan product, and the applicant’s credit score is 580.” This gives the consumer meaningful information they can understand and potentially act upon in the future.

Another common finding during a compliance audit is that institutions provide one or more specific reasons for denial but also include a vague, non-specific reason on the same notice. In most cases, one, two, or three well-written specific reasons are sufficient to support the credit decision.

Sometimes it is hard to put the specific reasons into writing. Softening the reason may seem to be a kind way to say no. However, non-specific reasons do not give consumers enough information to understand what prevented approval, what they may be able to improve, or whether another bank or credit union may offer a product they need.  

Keep in mind that adverse action files are often significantly thinner than approved loan files. As a result, examiners can more easily identify exceptions during an examination. Specific denial reasons also provide strong documentation that supports the credit decision and can help mitigate potential fair lending concerns.

CSG recommends that every bank and credit union periodically review recent adverse action notices to ensure specific reasons are consistently provided. If you are unsure whether your institution’s adverse action notices meet regulatory expectations, a targeted review can help identify opportunities for improvement before your next examination or audit. Contact us to learn more about our adverse action notice audit services and compliance support for banks and credit unions.

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