MGMT IANCE MANAGEMENT
By caRl G. PRy, cRcM
You Denied Me Why?
ConsiDeRinG that ReGulatoRy scRutiny and enforcement of fair lending are increasing, now is not the time to get careless about the regula- tions’ many operational requirements. But some of those requirements are fuzzy at best. We all know that we can’t discriminate on prohibited bases, but that’s actually the easy part. operationally that means proving it, which
includes ensuring that the right forms are completed the right way. and in the
world of Regulation B, none is more important than the adverse action notice.
Serious penalties can be assessed against
lenders for improper completion of forms.
The Equal Credit Opportunity Act (ECOA)
allows for civil liability, including actual and
punitive damages of up to $10,000 in individual actions and up to $500,000 in class
actions. Court costs and reasonable attorney’s
fees can also be awarded.
now reads “insufficient number of credit
references provided” on the Fed’s current
sample form, there are several lessons here:
No. 1, don’t change the language on the
sample form; No. 2, be specific and precise
with your denial reasons; and No. 3, know
what they mean to your bank and apply them
consistently.
Don’t Mess With the Form
A great way to deal with uncertainty is to
learn from others’ mistakes. Many things can
go wrong with completing the adverse action
notice, but a few stand out. This is nothing
new—a case against a well-known lender
more than 25 years ago is still relevant today. 1
After receiving an application for a used-car loan and determining that the consumer’s
“credit background was deficient in terms of
duration and extent,” the lender noted on the
adverse action form a denial reason of “credit
references are insufficient.” To make matters
more interesting, the lender modified the
Fed’s sample form, changing the verbiage of
the reason to “insufficient credit references.”
The court found that this reason communicated a different meaning. Specifically, “
insufficient credit references” suggests a quantitative inadequacy (you don’t have enough
references, which was the actual reason for
denial here), while the changed language implied a qualitative deficiency (the references
you provided aren’t good enough). Thus, “the
reason articulated was misleading, or at best
excessively vague,” and in the end the lender
was found liable.
Although that particular denial reason
Complete the Form Correctly
Another mistake made by the lender was not
completing Part II of the form to indicate that
credit report information contributed to the
denial, when in fact it did. Remember that if
credit report information contributes in any
way to the decision (whether that information
is negative or positive), Part II of the form
should be completed. On the other hand, if a
credit report was pulled but nothing from it
contributed to the decision in any way, Part
II should not be completed. The purpose of
that section is not to indicate that a credit
report was pulled; it is to tell the applicant
that information on his or her credit report
helped the lender make its decision.
months. What would be the reason to deny
the application? The lack of future income,
which could be shown by checking the “
income insufficient for the amount of credit
requested” box on the adverse action form.
It wouldn’t be because the income is derived from public assistance, because that’s a
prohibited basis. After all, you’d deny an applicant who tells you he’s a temporary worker
whose current assignment ends in six months
for the same reason. You don’t care about the
source of the income; you just care whether
or not it will continue. But if a note in the file
(or on the system) says something like “no
more worker’s comp in six months—deny,”
what does it look like? If this were picked up
during a fair lending examination, it could be
a big problem. The lesson to be learned is to
be specific as to the reason(s) for denial in all
documentation; vagueness means more fair
lending risk.
Don’t Make It Look Like
You Discriminate
(Because You Don’t)
A fair lending catastrophe may await when
documentation suggests that the denial reason was based on a prohibited factor rather
than the real reason. Say an applicant’s current source of income is public assistance
(unemployment, workers comp, etc.), and
during discussions with your loan officer he
mentions that the assistance runs out in six
Don’t Deny for Something
an Applicant’s Entitled
by Law to Do
A prohibited basis under Reg. B is “the fact
that the applicant has in good faith exercised
any right under the Consumer Credit Protection Act” 2 (CCPA). The CCPA is a section of
the U.S. Code that encompasses ECOA, Truth
in Lending Act (TILA), Fair Credit Reporting
Action (FCRA), and others. This prohibited
basis means you cannot take adverse action
when a consumer has done something to
which he or she is entitled under one of those
laws or regulations.
One such right under the FCRA allows a
consumer to place a fraud alert on his or her
credit file. While there are additional requirements that must be met before credit can be
granted when a fraud alert shows up (dealing
principally with identification), it would be a
fair lending violation under Reg. B to deny an
application because a fraud alert shows up on
a credit report, tempting as a policy like that
