When, exactly, is an adverse action notice necessary?
Let's take a quick look at the important issue of when to issue an adverse action notice.
We're here today to discuss the adverse action notice; specifically, when to issue it. Note: Although Massachusetts has its own "sidekick" rule ... the focus today is on the Federal requirements.
ECOA requires that a lender send an adverse action notice when it denies an "application." So the debate centers around a single word. Application. What we consider to be an application is particularly relevant for not only ECOA purposes, but also for HMDA, RESPA, and TILA.
Okay. So the confusing part is, that "application" is defined differently under different regulations. Although generally, "application" means the same under both ECOA (Reg. B) and HMDA (Reg. C), this is NOT TRUE with pre-qualifications. Under HMDA, the definition of "application" does not include pre- qualifications, while the opposite is true with ECOA. So this bothers some people, who ask, "why do I have to send an adverse action when I didn't have to report anything for HMDA?"
So here's how you define an application (for ECOA purposes):
Rule
Under ECOA, even an informal conversation (does not need to be in writing) with a borrower can be treated as an application where the loan officer:
Evaluates the borrower's information,
Makes a credit decision to decline the request, and
Communicates this denial to the borrower.
Contrast
There is no application for these purposes if any of these 3 prongs fails. For example, if under #2- the loan officer just shares basic information about the lender's policies and standards, instead of his/her opinion on the borrower's qualifications.
Fact vs. Opinion Rule
Many people refer to this as the "Facts vs. Opinion" Rule. If the loan officer just gives the borrower the facts--"our loan policy is to accept 600 FICO scores and above"--and stays away from offering an opinion--"based on your credit score, I doubt you'd qualify for a loan here"--then there is no need to issue an adverse action. Note: To avoid any implications, the loan officer would do best to affirmatively advise the borrower that he/she is not making a credit decision. E.g., "Our policy normally is to accept only 600 FICO scores ... I don't know what your score would be, and even if it is below 600, there may be other factors that allow us to make an exception--I won't know unless you submit an application."
Example A: Adverse Action Required
A loan officer discusses a mortgage with a potential borrower. The loan officer does not pull credit or receive a written application. But the borrower explains he recently went through bankruptcy, believes that his credit score is awful, and wishes to purchase a house in a price range that would leave him with very little disposable income. Now, a reasonable loan officer wants to avoid doing all the work on a loan that obviously won't clear the underwriter's desk. But nonetheless- if the loan officer now explains that the borrower is unlikely to qualify, thereby discouraging the borrower from applying, this is probably a credit decision. Thus probably treated as an "application" for ECOA purposes. And an adverse action notice would be required. Note: This is not HMDA-reportable! Nor is it not an application so as to trigger initial disclosures.
Example B: Adverse Action Not Required
Suppose the same facts as above. However, instead of commenting
on whether the borrower would likely qualify for a loan, the loan officer says the following: "The Bank's basic lending policies include a 40% DTI limitation, 80% LTV, and a minimum FICO score of 650. But it is more complicated than that. Before I could make any decision, I would need to look at all of your qualifications. Can we meet for coffee tomorrow? I can bring an application form and we can go through it together."Contrast with above -- here, the loan officer has stuck to the "facts" and avoided expressing an "opinion" on this borrower's loan. No adverse action is required.
Practical Considerations
You might be asking - how am I going to police (or the examiner, for that matter) what exactly the loan officers are saying to borrowers? Well- there may be no good answer ... you hire good people and provide them with adequate training and supervision. From a regulatory examination point of view-- putting aside more exotic investigation tactics, we have heard of regulators reviewing the number of credit pulls. When they see that you pulled credit 100 times with no response taken afterwards--whether adverse action or approved loan, that may trigger a deeper investigation into whether you're properly giving adverse actions. Just a thought!
For your reference, most of the rules discussed here can be found in 12 CFR 1002.2, 1002.9, 1003.2 the Official Interpretations to all three, HMDA Getting it Right, and the FDIC's 1996 manual on Mortgage Loan Pre-qualifications: Applications or Not.
In other news:
Are you available on 10/23? Mass. Bankers is running an exciting 1/2 day program in Marlborough. The program addresses how to operate an effective compliance management system. I'll be speaking, as well as the FDIC and some leaders from the industry-side. Contact Ben Craigie for more details - 617-502-3820 - bcraigie@massbankers.org ... it should be worth your while.
Interesting news from the DOB on pre-approvals. I submitted an official request for an opinion letter from the DOB. My question was basically, Is it a pre-approval if we pull a credit report, run it through automated underwriting, and issue something called--not a Pre-Approval--but a certificate of financing eligibility. The DOB responded late last month with a letter, the key sentence in which it stated: "Although not reduced to definition or a universal standard, the combination of a credit report review, subjecting the mortgage application to automated underwriting, and thereafter issuing a 'certificate of financing eligibility' shares characteristics typically associated with the pre-approval process." So ... it sounds like a pre-approval under MA law?
The US Supreme Court has accepted another disparate impact case ... let's hope it doesn't get settled before they can analyze this hot button fair lending issue!
Come join us for the CMS with Mass. Bankers with FDIC and other
In what could be the quote of the day if it wasn't so depressing - "I recently tried to refinance my mortgage and I was unsuccessful in doing so." Ben Bernanke. Read the story here.
Why are you a good leader? What do good leaders do? Fascinate. According to some, good leaders fascinate colleagues and clients. Don't think you're fascinating? You might be wrong. There are many different ways to be fascinating: Innovation, Passion, Power, Prestige, Trust, Mystique, or Alert. Think you might be fascinating by being "Alert," for example? Here's what Sally Hogshead has to say about people who fascinate in this way:
When details matter, Alert has an upper hand over less structured personalities. They are watchful, aware, with an ability to manage complex projects. Their risk-adverse attitude helps them to avoid mistakes. They know the critical path of their projects by heart. They understand that minor issues can cause major delays. They never lose track of deadlines. They're able to juggle conflicting requirements, such as meeting tight deadlines without compromising product specifications
If you want to know whether you fascinate, or how, you can take Sally Hogshead's Fascination Assessment, and determine your "F-Score" to see how you fascinate. The ideas above are adopted from her research and writing into this subject.
"The trouble is, you think you have time."
- Buddha
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