The following is an article reprinted with permission from the Fall 2006 edition of The WWR Letter:
To “B” Or Not to “B”: Sending Adverse Action Notices
By: John B.C. Porter, Esquire
The Fair Credit Reporting Act (“FCRA”) requires creditors to give adverse action notices (“AAN”) to each consumer whose application has been denied in part due to the evaluation of their credit report. There are two essential prerequisites to this obligation:
(1) The creditor acquired the consumer’s credit report; and
(2) The creditor took adverse action based on information contained within the consumer’s credit report.
The Equal Credit Opportunity Act (“ECOA”), implemented through Regulation B, also requires creditors to provide consumers with AAN when denying a consumer credit based in whole or in part on information contained within a consumer’s credit report. Both acts require AAN, but the acts differ on what triggers the AAN, to whom the creditor must provide the notice, and what information the AAN must contain.
Regulation B’s requirements are listed within 12 CFR §202.9, and require the AAN to include the:
· Creditor’s name and address
· A statement of the action taken
· A list of the principle and specific reasons for the AAN
· The ECOA notice
The FCRA notice, found within §615(a) of the Act, requires a:
· Statement that the creditor used the credit report in taking adverse action
· The address and telephone number of the credit reporting company
· A statement that the consumer has a right to a copy of their credit report and to dispute the accuracy of information in the report
· A statement that the credit bureau did not participate in and cannot explain the credit decision
When more than one consumer is involved, Regulation B allows creditors to send one notice. This is based on the assumption that if several people apply together for credit, they will be in communication with each other and can share the information about the decision. The FCRA, however, does not allow for one notice to serve all consumers whose credit reports were used for denial of credit. Because the FCRA protects an individual consumer’s rights with regard to how information about him or her is obtained and used, the FCRA adverse action notice must go to each consumer whose report was used in taking the adverse action.
Let us go through some real world examples to illustrate whether an AAN is necessary, what kind of notice is required, and to whom it should go:
1) A consumer opens a checking account with an ATM card. The consumer also requests a debit card, but his credit report does not warrant this feature. AAN?
The consumer needs a FCRA AAN, because this is not a request for credit, but adverse action was taken on an account based on the consumer’s credit report.
2) A consumer’s credit limit on a line of credit is suspended or terminated due to delinquency. AAN?
No. According to Regulation B Commentary, “The term adverse action does not include a creditor’s termination of an account when the accountholder is currently in default or delinquent on that account.”
3) A consumer is denied credit based on his original application, but accepts a counteroffer. AAN?
No. If a counteroffer is accepted, no AAN is necessary.
The consumer does not accept the counteroffer. AAN?
Yes. A creditor must notify a consumer of action taken within 90 days after notifying the consumer of a counteroffer if the consumer does not expressly accept or use the credit offered. However, a creditor that gives the consumer a combined counteroffer and AAN need not send a second AAN if the consumer does not accept the counteroffer.
4) A consumer applies for a loan via the Internet. May the creditor send the consumer an AAN via e-mail?
If the creditor has the consumer’s prior consent, the creditor may send the consumer an AAN via e-mail. Prior consent is obtained in the manner prescribed by E-Sign, including disclosures and an opt-in process that demonstrates success with the medium.
5) A consumer is denied further non-contractual overdraft privileges (courtesy pay) for failing to bring his account current. AAN?
While overdraft protection programs are “incidental credit” under Regulation B, an AAN is not necessary because the AAN requirements of Regulation B, §202.9, do not apply to “incidental credit.”
Determining whether an AAN is necessary, whether the AAN falls within the FCRA or Regulation B (or both), and ensuring that the right parties receive the AAN can be a complicated process. It is imperative, however, that your credit union understand this process and train its personnel properly.
John B.C. Porter is an Associate in the Credit Union department of the Brooklyn Heights operations center. He can be reached at (216) 739-5003 or firstname.lastname@example.org.