VIDEO: Inquiry as a Factor on Adverse Action Notices
In this Compliance Clip (video), Adam answers a unique question about listing inquiries as a factor in the adverse action notices. Specifically, the question is whether or not creditors are required to include the number of inquiries in the list of factors affecting the credit score if it is the fifth key factor. The answer to this question will come from the FCRA and Regulation B, but specifically from the preamble to the July 15, 2011 Regulation B final rule.
Video Transcript
The following is a transcript of this video:
This Compliance Clip is going to talk about inquiries as a factor on the adverse action notice. I’ve received this question several times over the years and realized that I haven't yet done a video on this. The question I got, specifically this time was a little bit different in regards to listing inquiries as a factor in the adverse action notices. Somebody was asking about inquiries and they understand that on the Adverse Action Notice, you're supposed to list the four key factors that affected the credit score and if inquiries is a factor, then you would list five. The inquiries being the fifth in the credit score. The question went on to say this, “It has always been my understanding that if the number of inquiries is listed as the fifth key factor as affecting the credit score, then that is a business decision on whether that factor is used as the fifth factor. It is more important to use the four primary factors and if it's the fifth one, it's up to you whether or not you include it.”
That's actually a question I hadn't heard before. So I dug into the original rule back in 2011, because the answer is going to come from the Fair Credit Reporting Act and Regulation B, but specifically, we're going to get our answer from the preamble to the July 15, 2011 Regulation B final rule.
I dug into the preamble and here is what I found. It said this under Number of inquiries and I think somebody from Europe has written in the CFPB using the enquiries spelled with an E rather than an I, but that's how they spell it in this final rule. They say, “Several industry commenters suggested that creditors not be required to disclose the number of enquiries as a key factor that adversely affected the credit score if the number of enquiries is not one of the top four key factors. In these cases, the commenters said that the effect of the number of inquiries on the credit score is marginal, so that disclosing the number of inquiries as a key factor may be confusing to consumers.” They're saying it's not a big deal if it's not one of the top four, so it shouldn't be included. Well, that's what the commenters said in the comment period for this from the proposal.
In the final rule, here's what they actually said. They said, “As discussed above, section 609(f)(9) of the Fair Credit Reporting Act states that if the number of enquiries is a key factor that adversely affected the consumer's credit score, that factor must be disclosed pursuant to section 609(f)(1)(C) of the Fair Credit Reporting Act without regard to the numerical limitation. The Fair Credit Reporting Act accordingly requires disclosure of the number of enquiries as a key factor, regardless of whether it is one of the top four key factors. Thus, the agencies adopt the proposed provision without change.”
This is one of those rare instances where I got a somewhat unique question and the prefatory text specifically answered it almost the exact same question that was asked. As a best practice, I always recommend to use the credit report to provide the key factors that you're putting on your adverse action notice. These key factors are not your denial reasons, which is something else, these are the key factors required by the Fair Credit Reporting Act and incorporated in this Reg B final rule. These are the key factors you're getting right off of your credit report. It usually lists four and and if inquiries is there, some credit reporting agencies list them together but some actually list inquiries down below in a lower section. That's what they're talking about here.
Let's back up in the prefatory text and I want to show you what they say about what I just said. They said, “If a creditor is using a credit score purchased from a consumer reporting agency, the consumer reporting agency is in the best position to identify the key factors that affected the score. Thus, the creditor would need to and absolutely could rely on the information in its disclosure to consumers.” That's what I always do when I'm auditing an adverse action notice. When I get to the key factors, which is at the bottom of the adverse action notice, not at the top, which are denial reasons which are different, but the key factors affecting the credit score at the bottom. What I always do is pull up the credit report and look for the key factors there. If the key factors aren't there, I also look for the exception notice. In fact, a lot of times that’s where I’ll go to first, depending on the bank, I look in the exception notice provided to consumers because it contains the key factors, including inquiries, as one of the reasons, usually broken into the clump rather than broken out with like some credit reporting agencies do.
The preamble actually goes on to talk about this. They say, “In any event, creditors have two options. They can write their contracts with consumer reporting agencies to require the consumer reporting agencies to provide the key factors adversely affecting the credit score.” So you can require your consumer reporting agency, your credit reporting agency, to put the key factors right on the credit report, or number two, you can choose to send credit score disclosure exception notices to all consumers applying for non-mortgage credit. Your other option is to use a credit score exception notice. In here, they say, you can choose to send that credit score disclosure exception notice to all consumers applying for non-mortgage credit. That would be in the case that the credit reporting agency is not putting that on your credit report.
That's a lot of information, of course it is. It's a topic that I am quite passionate about. So that was the question I received today. I figured it'd be good to share with you in this Compliance Clip.