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Thursday, March 31, 2016

Pulling Credit: Issuing the Adverse Action Notice

QUESTION
As a mortgage broker, we are trying to minimize our responsibility to issue denial letters. If we do not have the six pieces of information or otherwise take an application, but pull a consumer’s credit through a credit vendor rather than our LOS software, do we need to issue a denial? 

ANSWER
If you are pulling credit, regardless of whether you are doing so from your own LOS software versus a credit vendor, and a credit decision is being made (i.e., declining the loan based on credit) and communicated to the consumer, under the Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, an adverse action notice must be sent to the consumer within 30 days. 

Under ECOA and Regulation B, a notice of action taken must be provided within thirty days of receipt of a completed application. [12 CFR § 1002.9(a)(1)] For ECOA and Regulation B purposes, a creditor has a completed application when the creditor has received all of the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested. [12 CFR § 1002.2(f)]  

The ECOA definition of application differs from the definition of an application under the TILA-RESPA Integrated Disclosure Rule (“TRID”). Under TRID, a creditor has an application upon the consumer’s submission of his name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount.  [12 CFR § 1026.2(a)(3)(ii)] 

Under ECOA, it is how the creditor treats the information submitted by the consumer that determines if the creditor has an application. It is entirely possible that the creditor may have an application under ECOA prior to receiving the six pieces of information required under TRID. For example, if in discussing a prequalification or any other request with a consumer, the loan officer obtains the consumer’s permission to pull credit, actually pulls and reviews the credit report, determines that the consumer will not qualify for any of the lender’s programs, and communicates this decision to the consumer, those actions trigger the need for a Regulation B adverse action notice.

It should be noted that as a mortgage broker does not have the authority to participate in a credit decision, it is the lender who should issue the adverse action notice.  The caveat to this general rule is that a broker may issue the notice on behalf of the lender; however, if it does so, the notice must include the identity of the lender which declined the loan. [12 CFR 1002.9(g)] So, essentially, a broker must seek a lender’s denial for the consumer in order for the Regulation B notice to issue.

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance 
Lenders Compliance Group