Notice of Action Taken

1. Notice of Action Taken

2. ECOA Notification Requirements • Creditor must inform applicant of any action taken on a credit application, whether favorable or adverse. • Timing and content of the notifications are dependent upon the type of action taken and the status of the application.

3. ECOA Notification Requirements Determine whether or not an application has been received upon which action can be taken. • Inquiry or Application • The creditors’ actual procedures and not stated policies will distinguish credit inquiries and credit applications. Determine whether the application is “complete” or “incomplete.” • Completed credit application supplies creditor with all information that is regularly obtained and considered in evaluating applications for the amount and type of credit requested.

4. Inquiry or Application? • If a creditor has both a policy and a practice of not accepting oral applications or of not making credit decisions based on oral applications, then a telephone or other oral inquiry would not constitute an “application” under Regulation B. • If a creditor has either a policy or a practice of making credit decisions without requiring completion of a written application, then an “application” will be deemed to have been received if the inquirer provided sufficient information concerning his ability to repay the loan to the degree that the creditor is able to evaluate the information and indicate to the applicant whether the credit would be extended. • Whether an inquiry becomes an application depends on how the creditor responds to the applicant, not on what the applicant says or asks.

5. Inquiry or Application? The Official Commentary contains four examples of situations in which only an inquiry has taken place: (1)When a consumer calls to ask about loan terms and an employee explains the creditor’s basic loan terms, such as interest rates, loan-to-value ratios, and debt-to-income ratios. (2)When a consumer calls to ask about interest rates for car loans, and in order to quote the appropriate rate, the loan officer asks for the make and sales price of the car and the amount of the downpayment, then gives the consumer the interest rate. (3)When a consumer asks about terms for a loan to purchase a home and tells the loan officer her income and intended downpayment, but the loan officer only explains the creditor’s loan-to-value ratio policy and other basic lending policies, without telling the consumer whether she qualifies for the loan. (4)When a consumer calls to ask about terms for a loan to purchase vacant land and states his income, the sale price of the property to be financed, and asks whether he qualifies for a loan, and the loan officer responds by describing the general lending policies, explaining that he would need to look at all of the applicant’s qualifications before making a decision, and offering to send an application form to the consumer.

6. Prequalification Request • The creditor evaluates specific information about the consumer and tells the consumer the loan amount, rate, and other terms of credit the consumer could qualify for under various loan programs, explaining the process the consumer must follow to submit a mortgage application and the information the creditor will analyze in reaching a credit decision. Should you treat this as an inquiry or an application? • After evaluating information, the creditor decides that it will not approve the request and communicates that decision to the consumer. Should you treat this as an inquiry or an application subject to the adverse action notice requirements?

7. Complete or Incomplete? Examples of information a creditor may require, in addition to that furnished in the application, before an application is deemed “complete,” include (1) credit reports, (2) employment and deposit verifications, (3) additional information requested from the applicant and (4) approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure or provide security for the credit or collateral. If an application is incomplete with respect to matters that the applicant can complete, a creditor is required to make a reasonable effort to promptly notify the applicant of the incompleteness and to allow the applicant a reasonable opportunity to complete the application.

8. Different Types of Action Taken • Approval • Denial • Counteroffer • Incomplete Application

9. Approval • Notice of approval must be made within 30 days after receiving a completed application. • Notice of approval may be expressly stated or implied (for example, the creditor may give the applicant the credit card, money, property, or services for which the applicant applied).

10. Denial • A creditor must notify the applicant of adverse action within 30 days after receiving a complete credit application. • The adverse action notification must be in writing and must contain the following: • Name and address of the creditor; • Nature of the action that was taken; • Identity of the federal agency responsible for enforcing compliance with the act for that creditor; and • A statement of the specific reason(s) for the action taken; or • A disclosure of the applicant’s right to a statement of reason(s) within 30 days after receipt by the creditor of a request made within 60 days of such notification along with the name, address, and telephone number of the person who can provide the specific reason(s) for the adverse action.

11. Counteroffer • The creditor must notify an applicant of adverse action within 90 days after making a counteroffer unless the applicant expressly accepts or uses the credit during that time. • A notification of rejection of credit applied for coupled with counteroffer of credit may be given either in writing or orally. • If the creditor gives a written combined counteroffer and adverse action notice, it is not required to give the applicant a second adverse action notice if the applicant does not accept the counteroffer. • A sample of a combined notice is contained in Form C-4 of Appendix C to Regulation B

12. Incomplete Application When a creditor receives an incomplete application, it may choose to either: • Notify the applicant of action taken; or • Notify the applicant of the incompleteness of the application. Regardless of which notice is provided, it must be provided within 30 days. The notice of incompleteness must be in writing and must specify the information the creditor needs if it is to consider the application; it must also provide a reasonable period of time for the applicant to furnish the missing information.

13. Withdrawn Application Adverse Action Notice is not required: • When a credit applicant expressly withdraws an application • When the creditor approves a credit application and both parties expect that the applicant will inquire about its status, but the applicant does not inquire within 30 days after application(the approved application is treated as withdrawn)

14. What is Adverse Action? Regulation B defines adverse action as: • Denial of an application for new credit. • Termination or unfavorable change in terms of existing credit. • Refusal to increase existing credit.

15. What is Adverse Action? The FCRA, by contrast, defines adverse action more broadly to include: • The ECOA definition of adverse action; • Noncredit, consumer-initiated transactions and applications for insurance, employment, rental, and a government license or benefit. FCRA only applies to consumer transactions.

16. What is not Adverse Action? To provide greater clarity about the definition, Regulation B also specifically describes what is not adverse action: • A change in the terms of an account expressly agreed to by an applicant; • Any action or forbearance relating to an account taken in connection with inactivity, default, or delinquency as to that account; • 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; • A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested; or • A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested

17. When Adverse Action Notice is Required Regulation B (Consumer and Business) A creditor must provide notice if it has: • Taken adverse action on a completed credit application; • Taken adverse action on an incomplete credit application; • Taken adverse action on an existing credit account; or • Made a counteroffer to an application for credit and the applicant does not accept the counteroffer.

18. When Adverse Action Notice is Not Required Regulation B (Consumer and Business) Notice is not required if: • The transaction does not involve credit; • A credit applicant accepts a counteroffer; • A credit applicant expressly withdraws an application; or • The creditor approves a credit application and both parties expect that the applicant will inquire about its status, but the applicant does not inquire within 30 days after application(the approved application is treated as withdrawn)

19. When Adverse Action Notice is Required FCRA (Consumer) For a covered transaction, a person must provide notice if: • Adverse action was taken based in whole or in part on information in a consumer report; • Consumer credit is denied or a charge for credit increased based on information obtained from third parties other than consumer reporting agencies bearing upon the consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living; or • Adverse action was taken based on information furnished by a corporate affiliate of the person taking the action

20. Who Must Receive Adverse Action Notices Regulation B Any applicant, including individuals applying for credit, businesses of all sizes, and any person liable or who will become liable for the debt such as a coapplicant. Guarantors are not “applicants” under Regulation B’s definition of applicant. FCRA Any consumer defined as an individual, including coapplicants

21. Who Must Receive Adverse Action Notices Multiple Applicants Regulation B • If multiple applicants submit an application, notice need only be given to the primary applicant if the primary applicant is readily apparent. FCRA • The statute has been interpreted to require notice to all consumers against whom adverse action is taken if the action taken was based on information in a consumer report.

22. Content for Adverse Action Notices Regulation B (Consumer and Business) Notice provided shall include the following disclosures:The creditor’s name and address • An ECOA antidiscrimination notice substantially similar to the one in 12 C.F.R. §1002.9(b) (1) • The name and address of the creditor’s primary regulator • A statement of action taken by the creditor • Either a statement of the specific reasons for the action taken or a disclosure of the applicant’s right to a statement of specific reasons and the name, address, and telephone number of the person or office from which this information can be obtained

23. Content for Adverse Action Notices FCRA (Consumer) Notice of adverse action based on information in a consumer report must include the following disclosures: • Notice that adverse action was taken based on information obtained from a consumer reporting agency • The consumer’s right to: • Obtain a free copy of his or her consumer report from the consumer reporting agency providing the information if requested within 60 days • To dispute the accuracy or completeness of any information in a consumer report furnished by the consumer reporting agency • The name, address, and telephone number of the consumer reporting agency that furnished the report to the person • A statement that the consumer reporting agency did not make the credit decision and is unable to provide to the consumer the specific reasons why the adverse action was taken • Credit score disclosures if the credit score was a factor in taking adverse action

24. Content for Adverse Action Notices FCRA (Consumer) When consumer credit is denied or a charge for credit increased based on information obtained from third parties other than consumer reporting agencies the notice must include the following disclosures: • The consumer’s right to request the information that was relied on in taking adverse action within 60 days of receipt of the adverse action notice; the information must be provided to the consumer within a reasonable period of time When taking adverse action based on information obtained from an affiliate the notice must include the following disclosures: • Notice that adverse action was taken based on information from an affiliate and the consumer’s right to obtain the information by sending a written request within 60 days after receipt of the adverse action notice; the information must be provided within 30 days after receiving the request

25. Adverse Action Notices for Business ApplicantsRegulation B • For businesses with gross annual revenues of $1 million or less, the notice must include the same information described in Slide 16, except the disclosure of the applicant’s right to receive the statement of reasons can be given at application. • For businesses with gross annual revenues greater than $1 million, a creditor is only required to provide a statement of reasons for adverse action and the ECOA antidiscrimination statement if the applicant makes a written request for the information within 60 days of notification.

26. Credit Score Disclosure • The FCRA requires any person that uses a credit score to take an adverse action against a consumer to make additional disclosures to consumers as part of the adverse action notice already required by FCRA Section 615(a) (refer to Slides 17-18). • But if the credit score did not play a role in the decision to take adverse action, these disclosures are not required.

27. Credit Score Disclosure The following additional disclosures are required as part of the adverse action notice when you use a consumer’s credit score in taking adverse action: • The consumer’s numerical credit score used by the person in taking adverse action • The range of possible credit scores; • All the key factors that adversely affected the credit score; • The date on which the credit score was created; and • The name of the person or entity providing the credit score or the information upon which score was created.

28. Credit Score Disclosure • Credit score disclosures cannot be combined with any other disclosures required under the FCRA, although they can be combined with the adverse action notice disclosures required by Regulation B. • The credit score disclosures cannot be provided on a separate form; they must be included on the adverse action form. • Multiple credit scores: If you receive multiple credit scores, but only use one credit score in making the decision, that particular score and related information for that specific credit score must be disclosed. If you use multiple credit scores in making the credit decision, only one of the scores is required to be disclosed; however, the FCRA does not prohibit creditors from disclosing multiple credit scores to the consumer.

29. Regulation B and FCRA Combined Adverse Action Notice Appendix C of Regulation B  contains model adverse action notices that include the disclosures required under both Regulation B and the FCRA. Although not mandatory, proper use of the model notice forms satisfies the adverse action disclosure requirements of the FCRA and the ECOA.  • Top part of the combined notice covers the ECOA requirements. • Bottom part of the combined notice covers the FCRA requirements.

30. ECOA and FCRA Adverse Action Notice Exercise Questions • Creditor takes adverse action on a consumer individual credit application. A consumer report was not used in the decision to take adverse action. Which part(s) of the ECOA/FCRA combined adverse action notice must be completed? • Creditor takes adverse action on a consumer individual credit application. A consumer report and credit score was used in the decision to take adverse action. Which part(s) of the ECOA/FCRA combined adverse action notice must be completed? • Same facts in question 2., except a credit score was not used in the decision to take adverse action. Which part(s) of the ECOA/FCRA combined adverse action notice must be completed?

31. ECOA and FCRA Adverse Action Notice Exercise Questions • Creditor takes adverse action on a joint consumer application. A consumer report was not used in the decision to take adverse action. Who must receive the adverse action notice? Which part(s) of the ECOA/FCRA combined adverse action notice must be completed? • Creditor takes adverse action on a joint consumer application. Only the primary applicant’s consumer report and credit score were used in the decision to take adverse action. Who must receive an adverse action notice and credit score disclosure? Which part(s) of the ECOA/FCRA combined adverse action notice must be completed? • Same facts above, except both applicants’ consumer reports and credit scores were used in the decision to take adverse action. Who must receive an adverse action notice and credit score disclosures? Which part(s) of the ECOA/FCRA combined adverse action notice must be completed?

32. ECOA and FCRA Adverse Action Notice Exercise Questions • Creditor takes adverse action on a joint consumer application based on the co-applicant's consumer report and credit score. Who must receive an adverse action notice and credit score disclosure? Which part(s) of the ECOA/FCRA combined adverse action notice must be completed? • Creditor takes adverse action on a business credit application. Which part(s) of the ECOA/FCRA combined adverse action notice must be completed? • Creditor takes adverse action on a business credit application based on information in a consumer credit report of the guarantor. Which part(s) of the ECOA/FCRA combined adverse action notice must be completed?

33. Common Violations • Notice Violations: Common Regulation B adverse action notification and timing errors relate to handling incomplete applications. • Content Violations: Regulation B adverse action errors involving content typically relate to the statement of specific reasons for the action taken. • Credit Score Disclosure Violations: Failing to recognize when the requirement applies.

34. Hotline Questions and Answers Q1. We have an application that has been approved pending several conditions (including the return of the signed initial disclosure package). We notified the lender of the approval and conditions and I believe he has verbally communicated that information to the applicant. It has been nearly 30 days since the approval and the borrower has not provided any of the conditions (this is not an incomplete application). What are our adverse action requirements? If none, how long can we leave this application in the “approved pending conditions” status? A1: Regulation B does not discuss conditional approvals. However, I would interpret that an adverse action is not needed in this situation because I would consider this to be a withdrawal of an approved application. 12 CFR §1002.9(e) provides: “(e) Withdrawal of approved application. When an applicant submits an application and the parties contemplate that the applicant will inquire about its status, if the creditor approves the application and the applicant has not inquired within 30 days after applying, the creditor may treat the application as withdrawn and need not comply with paragraph (a)(1) of this section.”  Therefore, after 30 days has expired from notifying the borrower of the approval and conditions, the application can be treated as withdrawn and no adverse action needs to be taken. 

35. Hotline Questions and Answers Q1. Is the Bank required to give an adverse action notice if it takes adverse action against a consumer seeking to open a deposit account solely based on past history with the Bank? The bank did not run the consumer through Chexsystems nor did it pull any other type of consumer report. A1: No. The ECOA only applies to credit applications. FCRA covers any person who takes adverse action against a consumer, but the decision to take adverse action is based on information contained in a credit report. Since, the bank did not take adverse action against the consumer based on information contained in a credit report, it is not required to send an adverse action notice.

36. Hotline Questions and Answers Q1. We have a prequalification request for a mortgage loan. The customer has not provided the address of the real estate property he is purchasing. If we do not hear back from the customer, do we have to send a notice of adverse action within 30 days? A1. It depends on whether the prequalification request becomes a denied application. If the bank evaluates information provided by the consumer and tells the consumer a loan amount, rate, and other terms of credit the consumer would qualify for, and explains the mortgage application process, then it may treat this as an inquiry and an adverse action notice would not be required. However, if the bank evaluates the information provided by the consumer and decides that it would not approve the request and communicates that decision to the consumer, then the consumer must be treated as a denied applicant and be provided with an adverse action notice.

37. Questions? Thank you for your participation! We hope you found value in the presentation. If you have any additional questions, contact Compliance Alliance at hotline@compliancealliance.com or 888-353-3933.