VIDEO: Denial Reasons for Not Meeting a Minimum Credit Score
In this Compliance Clip (video), Adam discusses what denial reasons should be used when an applicant does not meet a minimum credit score. He explains that there are sometimes reasons that are easily listed on the Adverse Action notice, but other times, the reasons for a low credit score may not be as clear. If your financial institution has a minimum credit score requirement, this video is a must watch.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about denial reasons for not meeting a minimum credit score on an application. The question we have is this: We have a minimum credit score requirement and if an applicant does not meet that minimum, then the application is instantly denied. Would a custom reason “Applicant does not meet minimum credit score requirements” be acceptable to use?
The answer, of course, for this is going to come from Regulation B. Let's take a look at Regulation B because 1002.9(b)(2) of Regulation B says, “The statement of reasons for adverse action required by Paragraph (a)(2)(i) of this section must be specific and indicate the principal reasons for the adverse action. Statements that the adverse action was based on the creditor's internal standards or policies or that the applicant, joint applicant, or similar party failed to achieve a qualifying score on the creditor's credit scoring system are insufficient.”
In other words, you cannot just say “you failed to meet our credit score” or you cannot say “you're denied because you did not have a 680 credit score or 620 credit score”.
Now, you probably want to know what you are supposed to do. What you're supposed to do is you need to be more specific. You have to be more specific as to why their credit score did not meet your standards. In some cases, this is going to be pretty obvious and pretty easy. For example, if they also have late payments with others or late payments with you, collections, judgments, bankruptcy, or other credit report deficiencies, you just list those and then that's obviously the reason why their credit score is too low. So those are specific reasons.
Sometimes what happens is if your minimum credit score is relatively high, and I've seen a few clients I've worked with over the years who have a minimum credit score of something like 680, and when you have a minimum credit score of 680, they'll be customers who have credit scores below 680 who actually don't have any late pays with others. They don't have any late payments at all, no collections, no judgments and no bankruptcy. And so then it becomes a challenge to understand what to put down as a denial reason.
In this case, it gets complicated and there's not always a black and white answer but really the bottom line is you are supposed to tell them why their credit score was low. It could be that the reason their credit score was below 680 is they have a lot of revolving credit like credit cards that have high balances because when you have a high balance on a credit card, it lowers your credit score if you're not paying it off each month. So, if I have a credit limit of $10,000 and I've maxed that credit card out, that's actually going to bring my credit score down. I'm probably not in the 500 range, but if your minimum credit score is relatively high like a 680, it could be below that. And so, it gets a little bit complicated.
Now, sometimes what you can do to understand what affected the credit score is to look at the Fair Credit Reporting Act, the FCRA reasons, that are provided on your credit score disclosure that you provide to customers, especially if you have a risk-based pricing notice. Basically, on your credit report, it will tell you the reasons for the credit score being what it is. These reasons are also carried over to your Adverse Action Notice - on the bottom of your adverse action notice. These are not your denial reasons, these are the reasons that affected the score, and these are what I call the Fair Credit Reporting Act reasons.
Now sometimes these reasons may be justified to list as the reasons that affected the denial because if you denied somebody for a minimum credit score and they didn't have an obvious late payment or other credit deficiencies, you might need to look at the credit report to see what affected their score and these might be reasons you would include on your Adverse Action Notice. Now, these reasons were not canned reasons, so what you're going to have to do is choose the “Other” reason and type it in.
As a best practice, I always recommend that you don't let your lenders just type in any other reason that they want to because when that starts happening, I will tell you from experience, you start getting all kinds of reasons that are potential problems for Regulation B and for fair lending because there can be reasons that turn out to be potentially discriminatory or not consistent. And so as a best practice, it's always a good idea to have any other reason that is being put on an Adverse Action Notice, reviewed by one central reviewer, some sort of person to manage this and oversee this, maybe a senior lender, maybe some analyst, maybe a compliance officer, or compliance analyst. It's very important that you manage these “other reasons” to make sure there's consistency in your organization.
Sometimes pre-approving a reason is okay, if you know that you often see denials due to somebody not being approved for private mortgage insurance, for example. That might be something you could pre-approve and let your lenders use without getting approval for each Adverse Action Notice. But it's very important you manage those other notices.
Hopefully that answers the question of what we do for denial reasons when you're not meeting a minimum credit score. And that's all really all I have for this Compliance Clip.