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FAQs
Question: The bank received and approved a loan application. The lender informed the applicant that their application was approved. Several weeks have passed, and the lender has not heard from the applicant as to whether they accepted the bank’s credit offer or rejected it. How should we manage applications that are approved, but the applicant does not respond?
Answer: Reg. B, section 1002.9(e) addresses applications that are approved by the creditor and the applicant fails to respond to the bank. This section states the application can be treated as withdrawn if the applicant has not inquired about the application within 30 days after applying. Also, the bank is not required to send an adverse action notice in this scenario since it did not deny the applicant’s credit request. Instead, document in the loan file that the applicant did not respond to the lender’s notice of approval within 30 days and as a result, the bank is considering the applicant’s lack of response as their indication that they do not wish to proceed with the application.
The following is from section 1002.9(e) of Reg. B:
(e) Withdrawal of approved application. When an applicant submits an application and the parties contemplate that the applicant will inquire about its status, if the creditor approves the application and the applicant has not inquired within 30 days after applying, the creditor may treat the application as withdrawn and need not comply with paragraph (a)(1) of this section.
Question: Our underwriting guidelines require a minimum credit score of 650 for approval. If the applicant’s score is below 650, we automatically deny the credit request. When issuing the Adverse Action Notice, can we use the “other” box on the notice and indicate the reason for our denial is “applicant does not meet minimum credit score requirement” or must we be specific and state “applicant does not meet minimum credit score requirement of 650?”
Answer: Actually, it’s likely neither of those options is sufficient. Section 1002.9(b)(2) of Regulation B says, “The statement of reasons for adverse action required by Paragraph (a)(2):info: 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.”
So rather than say the applicant’s credit score does not meet minimum requirements or is not at least “x”, your AAN should detail WHY the applicant’s credit score is lower than your desired minimum score. This information will likely come from the credit report as well. Low credit scores are often reflective of late payments, collection items, garnishments, etc. However, sometimes an applicant’s lower credit score will be the result of too many open credit cards with high balance, or it may be the applicant has not established enough credit lines yet to establish a good credit history. If you are unsure of the reasons impacting the low credit score and obtain the credit score disclosure or risk-based pricing notice from the credit reporting agency, the notice will detail four factors impacting the credit score. These factors could be detailed on the AAN as the reason for the denial.
Question: We originate business purpose loans that have a government guarantee. We take the application and submit the application and other supporting documentation to the government agency for their approval. When the application is submitted to the agency, the lender considers the application to be a “completed application” and marks it as complete on our system. Reg. B requires the creditor to provide the applicant with a notice of action taken within 30 days of receiving a completed application. There are times when it takes longer than 30 days to receive a response from the guaranteeing agency. In those cases, we are not meeting the 30-day notification requirements under Reg. B. Are we starting our 30-day period to notify the customer at the proper time in the application process? Is the application really considered “complete” under Reg. B at the time we submit to the government agency or can we consider it “complete” at a later date?
Answer: Reg. B provides a definition of “application” as well as “completed application”. The definition of a completed application is when the creditor has received all the information it regularly obtains and considers in evaluating applications, including any approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure, or provide security for the credit or collateral.
The notification requirements state that the creditor has 30 days to provide the applicant a notice of the action taken after receiving a completed application. Since the definition of a “completed application” includes a response from the government agency, the 30-day timeframe for the creditor to provide notice starts upon receiving a response from the guaranteeing agency, not when the application is submitted to the agency.
Question: I have a joint application where one person qualifies and the other does not. How do I document a counteroffer to only one applicant? Does it matter if the counteroffer is made to the primary applicant or the co-applicant?
Answer: Reg. B requires when an application involves more than one applicant, a Reg. B Adverse Action Notice be provided only to the primary applicant where one is readily apparent. The rules vary a bit based on which applicant qualifies.
If the primary applicant qualifies and the co-applicant does not, the creditor should give the primary applicant a combined counteroffer/adverse action notice indicating the bank is unable to extend credit on the terms requested but is willing to extend credit only to the primary applicant and include the reason the co-applicant did not qualify. If the creditor includes a date by which the counteroffer must be accepted, the creditor need not send a second adverse action notice to the primary applicant if he/she does not accept the counteroffer. A sample of a combined counteroffer/adverse notice is contained in form C-4 of Appendix C to Reg. B. If the primary applicant receives the combined counteroffer/adverse action notice, then Reg. B does not require further notice to the co-applicant.
If the co-applicant qualifies and the primary applicant does not, the creditor must still send the Reg. B Adverse Action Notice to the primary applicant indicating the loan request has been denied and the reasons for denial. No written notice needs to be provided to the co-applicant. The Bank may verbally provide the counter offer to the co-applicant.
Question: Does Reg. B require counteroffers to consumers be made in writing?
Answer: No — but it does permit it and there are some advantages to providing written counteroffers. Reg. B requires a written notice when “adverse action” is taken against an applicant:
1002.9(a)(2) Content of notification when adverse action is taken. A notification given to an applicant when adverse action is taken shall be in writing and shall contain a statement of the action taken; the name and address of the creditor; a statement of the provisions of section 701(a) of the Act; the name and address of the Federal agency that administers compliance with respect to the creditor; and either:
- A statement of specific reasons for the action taken; or
- A disclosure of the applicant’s right to a statement of specific reasons
However, the definition of “adverse action” in Reg. B does NOT include when a creditor makes a counteroffer to an applicant and the applicant accepts that counter offer:
Adverse action. (1) The term means:
(i) A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counter offer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered.
So a counteroffer does not fall under the definition of “adverse action” unless the applicant does not accept the counteroffer. Thus, the initial making of a counteroffer does not constitute “adverse action” and trigger written notice; rather it’s the consumer’s response to your counteroffer that may trigger written notice. Keep in mind Reg. B states if the consumer does not accept the creditor’s counteroffer, the creditor must follow up and provide the written notice of adverse action within 90 days.
Alternatively, Reg. B permits, but does not require, creditors to provide a written counteroffer combined with the adverse action notice. A creditor that gives the applicant a combined counteroffer and adverse action notice that complies with the content requirements §1002.9(a)(2) is not required to send a second adverse action notice within 90 days if the applicant does not accept the counteroffer. Many creditors find the written combined counteroffer with adverse action notice a better choice to ensure compliance should the counteroffer not be accepted within 90 days. (December 2020)
Question: Must an adverse action notice be given to a co-borrower?
Answer: If a credit report for the co-borrower was not used in the credit decision, then the adverse action notice is only required to be given the primary applicant per Reg. B requirements. However, if a credit report for the co-borrower was used in the credit decision, then the co-borrower must receive an adverse action notice as well as the primary applicant. This is because the Fair Credit Reporting Act (FCRA) requires each person whose credit report is used in the credit decision to receive an adverse action notice. Refer to the for Combined Reg. B/FCRA Adverse Action Notice for more information. (September 2020)
Question: Must an adverse action notice be given to a co-signer or guarantor?
Answer: No, an adverse action notice is not required for a co-signer or guarantor. This was addressed in the 2011 Fair Credit Reporting Act rule amendments (page 41597). In the amendments, it explains that co-signers or guarantors are not considered applicants for the adverse action requirements and, therefore, would not receive an adverse action notice under either Reg. B or the Fair Credit Reporting Act. (September 2020)
Question: Applicant A and B come into the bank and jointly apply for consumer purpose credit. Applicant A has good credit, makes payments on time, has a good income source, etc. However, Applicant B has poor credit. It is the bank’s policy that each applicant have a minimum credit score of 640. Since Applicant B does not meet the bank’s criteria, the loan request will be denied. Can the bank state “Applicant B did not meet the bank’s underwriting standards” as a reason for denial on the Adverse Action Notice?
Answer: The bank must disclose all of the principal and specific reasons for denying the application (up to a max of four). A general statement saying, “Applicant B did not meet the bank’s standards for creditworthiness” would be insufficient according to Reg. B. The bank should provide the specific reasons the credit score was low such as delinquent credit obligations, collections, bankruptcy, etc. as applicable on the Adverse Action Notice. The same reasons can be listed on the Adverse Action Notice for each applicant. (July 2020)
Question: We do not make loans secured by manufactured homes. If a consumer applies for a manufactured home loan, I do not believe we have to send a denial notice because Reg. B only requires a denial notice when a creditor takes “adverse action.” The definition of “adverse action” in §1002.2(c) states the term adverse action does not include “(v) A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested.” Because we do not offer manufactured home loans, can we simply inform the applicant of this fact and forego providing an adverse action notice?
Answer: It depends. Does your bank offer home loans? There is an important provision in the Official Staff Commentary to the definition of “adverse action” that differentiates credit terms versus types of credit offered. It reads:
Paragraph 2(c)(2)(v).
1. Terms of credit versus type of credit offered. When an applicant applies for credit and the creditor does not offer the credit terms requested by the applicant (for example, the interest rate, length of maturity, collateral, or amount of down payment), a denial of the application for that reason is adverse action (unless the creditor makes a counteroffer that is accepted by the applicant) and the applicant is entitled to notification under §1002.9.
You indicate you offer home loans but not home loans secured by a manufactured home. Thus, your denial is not based on the fact you don’t offer home loans, but rather you don’t accept the type of collateral (credit terms) being offered by the consumer (a manufactured home instead of stick built home). Thus, the applicant would be entitled to an adverse action notice.
Now if the same consumer applied for an open-end line of credit to be secured by the manufactured home and you offered only closed-end mortgage loans, you would not have to provide an adverse action notice because you don’t offer the credit product (an open-end line) for which the consumer applied. (June 2020)