VIDEO: Adverse Action Notice for Withdrawn Counter-Offer
In this Compliance Clip (video), Adam answers a question about whether or not an adverse action notice is needed on a commercial loan application where a lender verbally counter-offers but the applicant declines the counter-offer and then asks to withdraw the application.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to discuss whether an adverse action notice is required for a withdrawn counter-offer on a business commercial loan. The question we have here says, “Upon receiving an application for a commercial loan to a business entity, the loan officer verbally counter-offered but the applicant denied and wanted to withdraw their application. Does this application need an adverse action notice? And if so, what are the decline reasons that we need to give the customer?”
This is our question and our answer, of course, is going to come from Regulation B. It comes from two parts from Regulation B. It's going to come from 1002.2, which is our definition section of Regulation B, as well as the 1002.9, which is the portion of regulation B that talks about adverse action notices, specifically 1002.9(a)(3). So let’s take a look at these parts of Regulation B.
First of all, 1002.2, the definition section of Regulation B, provides a definition of an adverse action and defines an adverse action as follows: An adverse action is a refusal to grant credit in substantially the amount or on substantially with terms requested in an application, unless the creditor makes the counteroffer, to grant credit in a different amount or on other terms, and the applicant uses or expressly accepts the credit offered. So our question here said that the loan officer verbally countered and the applicant denied then they wanted to withdraw their application. What it comes down to, even though the applicant technically tried to withdraw their application, they tried to withdraw supposedly, that doesn't matter because what we have here is an adverse action because we did not grant credit on the terms applied for, you provided a counter-offer and the applicant did not accept the counter-offer, so we essentially have a denial. Therefore, we need to provide an adverse action notice to the customer.
Now, let's look at the section on denial notices. 1002.9(a)(3) is the section of Regulation B that talks about this, and it outlines the adverse action notice requirements for business credit applications. There's a different part of this rule that talks about consumer applications, but this, specifically, this part of Regulation B talks about applications for business credit. It does vary per size of business, but this is going to apply to us regardless of the size of your business. Specifically, what it says is the statement of the action taken may be given orally or in writing, when adverse action is taken. So we can actually give the notice to the customer verbally. That is permitted. However, I would warn you that if you're giving notice, adverse action notices, to business customers verbally, you need to have a process to document the fact that you provided the notice verbally. There's another thing that must go along with that. Really, the easiest way to comply with the rules of 1002.9 and for the business applications is really to just provide a hard copy of an adverse action notice and give them a written, adverse action notice, and to send that to the applicant. That's the easiest for you to do.
The rule also says this, it says disclosures of an applicant's right to a statement of reasons may be given at the time of the application instead of when adverse action is taken. What this means is you have two options when you provide an adverse action notice. You can give the customer their denial reasons, or you can give them a statement that they have a right to their denial reasons if they want them. You can just give it to them and be done with it or you can give them a statement. On business applications, you can actually give them notice in advance. So you can give the disclosure that they have a right to a statement of the reasons, you can give them at the time of application and that is permissible. What that means is if they never contacted you for those reasons, you don't have to give it to them. If they do contact you, you have to provide them with the reasons.
Most people just get the reasons and they're done with it. It's the easiest way to handle that. If you're giving the reasons to answer our very specific question, you would use the denial reasons that were part of the original application. So not the counteroffer. You can use the denial reasons, why you denied the credit application from the original application, not the counter-offer.
That's the question we have for today. That's all we have for this Compliance Clip.