Second Review of Adverse Action Notices

Conducting a second review of Adverse Action notices is one of the best ways to reduce fair lending risk.  For this reason, examiners will often recommend a formal process by which to conduct a secondary review of adverse action notices if a bank or credit union does not already have one established as a part of their compliance management system

So the question we have to ask ourselves is this: what should a second review of adverse action notices cover?

The short answer is that we believe a second review should include two parts:

     1) a technical review, and

     2) a FL review

The Technical Review of Adverse Action

The goal of the technical part review is to ensure that the AA notice (the form itself) is properly completed.  This part of the review would look at both the Regulation B portions of the notice as well as the Fair Credit Reporting Act (FCRA) parts.  To conduct this review, we believe you could train just about anyone to do this, especially if you utilize a good set of review worksheets or a checklist.  The goal of this part of the review is to ensure the form is completed in compliance with the technical rules of both Regulation B and the FCRA.

The Fair Lending Review

The second part of the review is a bit more complex, but far more important from a fair lending perspective.  The goal of this second review is to look at a denied loan from a FL perspective – a file comparison perspective – and to ensure that the loan could not have been made another way, or would have been made by another lender.  Often times, we have seen where the reviewer of an adverse action notice just agrees with the denial which really isn’t the right approach to take for this review.  What a bank should try to accomplish from this review is to look at it from a different perspective: could this loan have been approved another way?  Or, would another lender have approved this loan?

To conduct this FL review, a financial institution would ideally include the person who oversees the bank’s loan exception program so that they would be able to identify any exceptions that were previously made by the bank and to compare those loans to the denied loan being reviewed to see if it could have a similar exception.  At least, a bank should have an experienced lender conducting this review as this review really need someone who can determine if there would be a way to do this loan (by exception, a different product, etc.)  This reviewer should look at the denial reasons and dig into the file (such as recalculate the income and scrub the CR).

The bottom line goal of this second review is to ensure that a bank didn’t approve a comparable file somewhere else.  How this is done will often depend on the bank’s specific processes, but the best option is to have someone who knows what exceptions have been made by the bank also reviewing denials.  When a bank effectively does this, it will be able to pro-actively reduce the risk of disparate treatment by comparative analysis, because it is pro-actively identifying similar loans and addressing them up-front, often before the denial actually takes place (such as is often the case for non-RE loans).

Who Should Conduct the Second Review

Logistically speaking, a bank will probably have two different people conducting these two reviews.  For the first review, a bank should be able to train just about anyone to do this (audit, compliance, loan manager, etc.).  That really shouldn’t be a big deal.

As the second review will probably include a more senior bank employee (who is also involved with the exception process), it won’t make since for that person to look at every denied application.  For example, there is no point in having a senior bank employee look at a loan with a credit score of 212 or a DTI of 138%.   Therefore, a good way to ensure a bank doesn’t waste this senior manager’s time is to establish a “referral process” where the employee conducting the first review only refers “suspect loans” over to the second reviewer.  Basically, the first person will conduct a “smell test” for fair lending purposes.  To do this, a bank could consider setting a list of parameters such as referring all denials with credit scores over a certain amount (600 or 625) and DTIs under a certain amount (under 50% or 45%).  The specific amounts of the referral parameters should directly correlate to each banks specific underwriting criteria – meaning, no two banks will have the same referral parameters.


The goal of this is to ensure that the obvious denials won’t waste someone’s time while ensuring that marginal denials – which are the concern with disparate treatment based on comparative evidence – will get an appropriate review.

The bottom line is to build an Adverse Action review process in a way that will reduce the risk of disparate treatment by pro-actively identifying marginal denials and comparing them to marginal approvals (exceptions) and then – this is the key – documenting everything thoroughly in the file. Properly implemented, this review program should be reflected on your fair lending risk assessment.

Loan Exception Tracking

HMDA Enforcement for 2018 Data