Question: We are a small mid-west bank with limited compliance staff. I receive your FAQ newsletter and actually have a folder for all of them! I wish we had compliance people who could handle all the compliance issues here. This is my first question. Our regulator came down hard on us for denying the available credit on a loan product. The credit report did not show any change, but another source disclosed an issue that would increase our risk. We did not think notice needed to be given, since the credit report information is not the reason for our decision. My question: is there a disclosure requirement when the credit report is not involved in denying credit?
Thank you for the kind words. We have offered this weekly newsletter for many years as our way of showing compliance support for participants in mortgage banking and, by extension, to consumers. Many of our clients do not have fully staffed compliance departments. But they don’t need to spend more on compliance than is really needed. Our firm is built on the proposition that you can obtain top level compliance expertise on a cost-effective basis for a flat monthly fee, no strings attached. With us, you actually interact with experts in compliance. Contact us for a free one hour consultation at any time.
Regarding your question, the view you express is common, though it is a misconception. The scenario triggers adverse action requirements.
If a financial institution denies consumer credit or increases the charge for consumer credit, in whole or in part, because of certain information obtained from a party other than a consumer reporting agency, the institution must, at the time the adverse action is communicated to the consumer, clearly and accurately disclose to the consumer his or her right to make a written request for the reasons for the adverse action within sixty days. If the consumer timely makes such a written request, the institution must provide the reasons for the adverse action with a reasonable period of time. [15 USC § 1681m(b)(1)]
You do not mention the source used for denying the extension of credit. Keep in mind that the type of information covered by the disclosure requirement obtained from a party other than a consumer reporting agency, bearing upon the consumer’s creditworthiness, may include findings involving credit standing, credit capacity, character, general reputation, personal characteristics or mode of living. [Idem] But be careful in construing these types of information for an adverse action decision, so as to avoid claims relating to fair lending violations and certain UDAAP allegations, among other things.
Jonathan Foxx, Ph.D., MBA, is Chairman and Managing Director of Lenders Compliance Group
, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in mortgage compliance, offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact Jonathan, please e-mail Compliance@LendersComplianceGroup.com