QUESTION
We are a small mid-west bank with limited compliance staff. I receive
your FAQ newsletter and actually have a folder for all of them! I wish we had compliance
people who could handle all the compliance issues here. This is my first
question. Our regulator came down hard on us for denying the available credit
on a loan product. The credit report did not show any change, but another source
disclosed an issue that would increase our risk. We did not think notice needed
to be given, since the credit report information is not the reason for our
decision. My question: is there a disclosure requirement when the credit report
is not involved in denying credit?
ANSWER
Thank you for the kind words. We have offered this weekly newsletter
for many years as our way of showing compliance support for participants in
mortgage banking and, by extension, to consumers. Many of our clients do not
have fully staffed compliance departments. But they don’t need to spend more on
compliance than is really needed. Our firm is built on the proposition that you
can obtain top level compliance expertise on a cost-effective basis for a flat
monthly fee, no strings attached. With us, you actually interact with experts
in compliance. Contact us for a free one hour consultation at any time.
Regarding your question, the view you express is common, though it is a
misconception. The scenario triggers adverse action requirements.
If a financial institution denies consumer credit or increases the charge
for consumer credit, in whole or in part, because of certain information
obtained from a party other than a consumer reporting agency, the institution
must, at the time the adverse action is communicated to the consumer, clearly
and accurately disclose to the consumer his or her right to make a written
request for the reasons for the adverse action within sixty days. If the consumer
timely makes such a written request, the institution must provide the reasons
for the adverse action with a reasonable period of time. [15 USC §
1681m(b)(1)]
You do not mention the source used for denying the
extension of credit. Keep in mind that the type of information covered by the
disclosure requirement obtained from a party other than a consumer reporting
agency, bearing upon the consumer’s creditworthiness, may include findings
involving credit standing, credit capacity, character, general reputation,
personal characteristics or mode of living. [Idem] But be careful in construing
these types of information for an adverse action decision, so as to avoid claims
relating to fair lending violations and certain UDAAP allegations, among other
things.
Jonathan Foxx
Managing Director
Lenders Compliance Group
