What Is Adverse Action?
Answers to CU questions about adverse action notices.
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 615(a) of the Fair Credit Reporting Act (FCRA) to require credit unions to disclose on adverse action notices a credit score used in taking any adverse action and information relating to that score (e.g., range of scores, key factors that adversely affected the score, etc.). Credit score disclosures also were added to the FCRA risk-based pricing notices when a creditor uses a score to price a loan.
Along with these changes came a flood of questions from credit unions on the adverse action notice provisions. Questions focused on the old and new requirements. So, here’s a refresher course on adverse action notifications.
ECOA & FCRA requirements
Section 701(d) of the Equal Credit Opportunity Act (ECOA) requires a credit union to notify a credit applicant when it has taken adverse action against that applicant. Section 615(a) of FCRA also requires a credit union to provide a notice when it takes an adverse action against a consumer based in whole or in part on information in a consumer report. Regulation B implements ECOA adverse action provisions. There are no implementing regula-tions for the adverse action requirements of Section 615(a) of the FCRA.
What’s ‘adverse action’?
Reg B defines adverse action as:
- A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the credit union makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered;
- An account termination or an unfavorable change in the account terms that doesn’t affect all or substantially all of a class of the credit union’s accounts;
- A refusal to increase the amount of credit available to an applicant who has made an application for an increase.
Adverse action doesn’t include:
- A change in account terms an applicant expressly agrees to;
- Any action or forbearance relating to an account in connection with inactivity, default, or delinquency;
- A refusal or failure to authorize an account transaction at a point of sale or loan, except when the refusal is a termination or an unfavorable change in the terms of an account that doesn’t affect all or a substantial portion of a class of the credit union’s accounts, or when the refusal is a denial of an application for a credit increase available under the account;
- A refusal to extend credit because applicable law prohibits the credit union from extending the credit requested; or
- A refusal to extend credit because the credit union doesn’t offer the type of credit or credit plan requested.
FCRA tracks Reg B’s definition of adverse action in the context of a credit application. Further, the FCRA’s definition of “adverse action” includes business, credit, and employment actions affecting consumers that can be considered to have a negative impact, such as denying or canceling credit or insurance, or denying employment or promotion based on information in a consumer report.
Next: Combined notices
The ECOA requires disclosure of the principal reasons for denying or taking other adverse action on an applica-tion for an extension of credit. The FCRA requires the credit union to disclose when it has based its decision in whole or in part on information from a source other than the applicant or from its own files. For example, if the applicant’s credit history reveals delinquent credit obligations and the application is denied for that reason, to satisfy Reg B the credit union must disclose the application was denied because of the applicant’s delinquent credit obligations. To satisfy the FCRA requirement, the credit union also must disclose that a credit report was obtained and used to deny credit.
Model notices in Reg B (Forms C-1 through C-5) include the content both the ECOA and the FCRA adverse action provisions require, so creditors can use the model notices to comply with the adverse action requirements of both statutes. The Federal Reserve Board amended these Reg B model notices to include the disclosure of credit scores and related information if a credit score is used in taking adverse action. The revised model notices reflect the new content requirements in section 615(a) of the FCRA as amended by section 1100F of the Dodd-Frank Act.
Under Reg B, credit unions must provide the adverse action notice in writing if the applicant is a consumer. If the applicant is a business, you may provide it orally or in writing. The notice must contain: a statement of the action taken; the credit union’s name/address; the ECOA notice (that it’s unlawful for the credit union to discriminate with respect to any aspect of the credit transaction); the name/address of the credit union’s regulator; 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. The applicant must request the infor-mation within 60 days of receiving the adverse action notice, and the credit union must provide the specific rea-sons within 30 days of receiving the applicant’s request.
FCRA’s Section 615(a) requires the adverse action notice to contain information regarding the consumer re-porting agency that furnished the consumer report used in taking the adverse action. It also requires the credit union to disclose that a consumer has a right to a free consumer report and a right to dispute the accuracy or com-pleteness of any information in the report.
Section 1100F of the Dodd-Frank Act amended this section of the FCRA to also require credit unions disclose this information if the adverse action was based on a credit score:
- The numerical credit score used to make the decision;
- The range of scores under the model used;
- Up to four key factors that adversely affected the consumer’s credit score (or up to five factors if the number of inquiries made with respect to that consumer report is a key factor);
- The date on which the credit score was created; and
- The name of thenperson or entity that provided the credit score.
Reg B only applies to loans. But FCRA covers “any person” who takes adverse action (not just creditors) against a consumer (not just a credit applicant). So, the credit union also would need to provide the FCRA information if it used a credit report or credit score to take adverse action against a consumer seeking to open a deposit account.
Timing of notification
Under Reg B, the credit union has 30 days to notify the applicant of its approval, counteroffer, or adverse action on the application. (When using the ECOA-FCRA model notice, the FCRA notice would naturally be provided within the same time frame.)
If the credit union has made a counteroffer, the offer may remain open for 90 days before the credit union must deliver an adverse action notice if the member hasn’t expressly accepted or used the credit offered.
For more information on FCRA and Reg B require¬ments, visit CUNA’s e-Guide to Federal Laws and Regulations at cuna.org.
VALERIE Y. MOSS is director of compliance information for the Credit Union National Association. Send compliance questions to firstname.lastname@example.org.