QUESTION
I have been told conflicting advice about the adverse action notice. Supposedly, these are people who are in the know. However, I am a compliance manager with no staff and don’t have a clear answer to my concerns.
First, I want to know what information I need from a credit bureau to issue an adverse action notice.
Secondly, I want to know what information I need from third parties that are not credit bureaus for me to issue the adverse action notice.
Third, and the biggest issue for me, I want to know who we should notify when multiple applicants are on a loan application. I say this is the biggest issue because this is the one on which I get a lot of conflicting advice.
So, here are my questions.
What is required for adverse action based on credit bureau information?
What is required for adverse action based on third parties?
And, who is supposed to get the adverse action notice when the loan is for multiple applicants?
ANSWER
You are not alone in feeling some consternation. Many compliance professionals express some confusion about the notification requirements of adverse action. Section 615 of the Fair Credit Reporting Act (FCRA)[i] requires lenders to provide adverse action notices in cases where information from a consumer reporting agency is used and instances where information from other third parties is used to make the adverse credit decision.
If you use a consumer credit report to take any type of adverse action that is based at least in part on information contained in a consumer report, you are required by the FCRA[ii] to notify the consumer. The notification may be in writing, orally, or by electronic means.
You may already be familiar with what the notice must contain, such as:
· A numerical credit score[iii] used in taking any adverse action based in whole or in part on any information in a consumer report along with the following related information:[iv]
o
The range of possible credit scores
under the model used;
o
All of the key factors that
adversely affected the credit score of the consumer in the model used, not to
exceed four;
o
The date on which the credit score was
created; and
o The name of the person or entity that provided the credit score or credit file upon which the credit score was created.
However, the adverse action notice must also include the following:
- The name, address, and telephone number of the credit reporting agency
(CRA) (including a toll-free telephone number, if it is a nationwide CRA) that
provided the report;
- A statement that the CRA did not make the adverse decision and cannot
explain why the decision was made;
- A statement setting forth the consumer’s right to obtain a free
disclosure of the consumer’s file from the CRA if the consumer requests the
report within 60 days; and
- A statement setting forth the consumer’s right to dispute directly with the CRA the accuracy or completeness of any information provided by the CRA.
I suggest you review the model adverse action forms in Appendix C of Regulation B, the implementing regulation of the Equal Credit Opportunity Act (ECOA), which include model language for making the above disclosures, including the credit score information.
Your second question is about adverse action notices based on information obtained from third parties that are not CRAs. I would add affiliates to that category. When a lender denies (or increases the charge for) credit for personal, family, or household purposes based either wholly or partly on information from a person other than a consumer reporting agency (such as a credit bureau), the FCRA[v] requires that the institution clearly and accurately discloses to the consumer their right to obtain disclosure of the nature of the information that was relied on by making a written request within 60 days of notification. The financial institution must provide the disclosure within a reasonable period of time following the consumer’s written request.
You may take an adverse action involving insurance, employment, or a credit transaction initiated by the consumer, based on information of the type covered by the FCRA. If this information was obtained from an entity affiliated with the institution by common ownership or control, the FCRA[vi] requires the financial institution to notify the consumer of the adverse action. The notification must inform the consumer that they may obtain a disclosure of the nature of the information relied on by making a written request within 60 days of receiving the adverse action notice. And if the consumer makes such a request, the financial institution must disclose the nature of the information no later than 30 days after receiving the request. The applicable section of the FCRA[vii], however, does not cover information obtained directly from an affiliated entity relating solely to its transactions or experiences with the consumer and information from a consumer report obtained from an affiliate.
Finally, you wanted to know about disclosing the adverse action notice where multiple applicants are on a loan application. The answer invokes both Regulation B as well as the Fair Trade Commission’s interpretation of the FCRA. In some cases, the rules of Regulation B regarding who must be provided the adverse action notice will differ from the rules under the FCRA. This is due to a Federal Trade Commission interpretation of Section 615(a) of the FCRA. The explanation is going to be a bit nerdy, but hang in there!
Section 615(a) of the FCRA requires that “any consumer,” with respect to whom adverse action is taken, must receive the disclosures mandated by this section if that action is based “in whole or in part” on information from a consumer report. In the FTC’s view, the plain language “any consumer” includes a co-applicant. Neither the applicable section of Regulation B[viii] nor the combined disclosure permitted in Appendix C remove or modify that requirement for co-applicants. The objective of the combined disclosures permitted by the Federal Reserve Board in Appendix C to Regulation B is only to simplify the paperwork involved in making ECOA and FCRA notifications to a single applicant, where both are required – for instance, where the action by the creditor is both adverse to the applicant (ECOA) and is based in whole or in part on information from that applicant’s consumer report (FCRA).
Because the FCRA[ix] provides that, in the context of a credit application, “adverse action” has the same meaning for purposes of the FCRA as is provided in the ECOA, we look to the definition of “adverse action”[x] set forth in the ECOA.[xi] Under these authorities, only an “applicant” can experience “adverse action.”[xii] The authorities further specify that a co-applicant is an “applicant,” but a guarantor is not.[xiii]Thus when there are two applicants, a creditor cannot send a combined ECOA/FCRA adverse action notification to only the primary applicant if the application is denied, even in part, based on information in a co-applicant’s consumer report. In that circumstance, the co-applicant has been the subject of “adverse action” and must be provided their own separate notification to satisfy the requirement of the FCRA.[xiv] If the creditor has provided the ECOA-required information specified in Regulation B[xv] to the primary applicant, it need not be included in the FCRA notice provided to the co-applicant.
The rule is different for a guarantor because they have not experienced “adverse action” that triggers the notice required by the FCRA[xvi] because the FCRA[xvii] adopts the ECOA definition, which excludes a guarantor. Thus, a creditor need not provide the guarantor with an FCRA adverse action notice, even if the application is denied in whole or in part based upon information from the consumer report of the guarantor. Under these circumstances, therefore, notification to the applicant is all that is required.
Chairman & Managing Director
[i] See 15 USC 1681m
[ii] § 615(a)
[iii] § 609(f)(2)(A)
[iv] § 609(f)(1)(B)-(E)
[v] § 615(b)(1)
[vi] § 615(b)(2)
[vii] Idem
[viii] § 1002.9(f)
[ix] § 603(k)(1)(A)
[x] 701(d)(6)
[xi] 15 USC 1691(d)(6); 12 CFR 1002.2(c)
[xii] 12 CFR 1002.2(c)(1)
[xiii] § 702(b), 15 USC 1691a(b); 12 CFR 1002.2(e)
[xiv] Op. cit. ii
[xv] See § 1002.9(a)(2)
[xvi] § Op. cit. ii
[xvii] § 603(k)(1)(A)
