All in Adverse Action

GUEST POST! This is another feature article by one of our Compliance Cohort members, Jennifer Johnson.  Jennifer is a Vice President and Chief Risk Officer at a $225 million community bank, and shares her years of experience in multiple banks with us in this fantastic article on the 30-day Reg B rule.

In an ideal world, loan applicants would come to us fully prepared with all the documentation we need to make a loan decision. I don’t know about you, but I certainly do not live in that ideal world. More commonly, applicants come to us with a loan request and bits and pieces of what we need, which can lead us to stash applications on the shelf while we wait for more information. Time passes, and before you know it, we have violated Regulation B’s 30-day rule. “Wait!” you may say, “what are you talking about? I didn’t have a completed application! How could I have violated ECOA’s 30-day rule?”  While it may be true that you didn’t have a completed application, if you stop there, you’re missing some of the important nuances of Regulation B’s notification requirements…

Denial Reasons of Excessive Obligations & Insufficient Income

This Compliance Clip (video) discusses the difference between two denial reasons found on most adverse action notices: 1) Excessive Obligations in Relationship to Income and 2) Insufficient Income for the Amount of Credit Requested. Adam discusses why most denial forms have these two different, but distinct debt-to-income (DTI) options and explains the best practice for when to use each reason - which might not be what you think.

Using a Credit Score Disclosure in Lieu of the Adverse Action Notice

This Compliance Clip (video) answers the question of whether the FCRA pieces of the AA Notice must be completed every time, or if creditors can combine certain FCRA disclosures with the AA Notice. Adam attempts a new approach to adding a bit of humor to a mundane compliance topic and fails terribly. He makes a promise to never attempt this approach again (unless he is asked).

Over the years, I have seen many financial institutions struggle with the adverse action notice requirements under Regulation B, especially in regards to what denial reasons should be listed on the adverse action notice.  This is particularly true when an applicant is denied for a reason relating to income and the applicant’s debt-to-income (DTI) ratio as most adverse action notice vendors provide two similar, but different, options relating to income: excessive obligations in relation to income and insufficient income for the amount of credit requested.  

When a financial institution receives a request for a loan, they are required to respond to that applicant within a certain amount of time to advise them of their credit decision.  That time, however, can vary based on the specific situation and/or financial institution, which has left many compliance professionals confused as to what actually is required. Therefore, let’s take a quick look at the rules and break down what they mean.