Our Compliance Hub Hotline often gets asked about adverse action notices when an application involves both an applicant and a guarantor. Does the bank need to send notice to both the applicant and the guarantor? Is the bank allowed to send a notice to the guarantor even when it may not be required?
If an individual is acting as a guarantor, a surety, or in a like capacity on a commercial loan, an adverse action notice is typically not required. In looking at the regulatory basis for this reasoning – the FCRA definition of adverse action is based on ECOA’s definition of adverse action, and ECOA’s definition does not apply to guarantors, as outlined below:
“…An application may involve a guarantor or co-signer. Some industry commenters asked whether a guarantor or co-signer should receive an adverse action notice. These commenters also asked whether the guarantor’s or cosigner’s credit score should be disclosed to the applicant, where the creditor uses the guarantor’s or co-signer’s credit score in taking adverse action. Under section 701(d)(6) of the ECOA and § 202.2(c) of Regulation B, only an applicant can experience adverse action. Further, a guarantor or co-signer is not deemed an applicant under § 202.2(e). Sections 603(k)(1)(A) and 603(k)(1)(B)(2) of the FCRA provide that adverse action has the same meaning for purposes of the FCRA as is provided in the ECOA and Regulation B in the context of a credit application. Therefore, a guarantor or co-signer would not receive an adverse action notice under the ECOA or the FCRA.
The credit applicant would, however, receive an adverse action notice, even if the adverse action decision is made solely based on information in the guarantor’s or cosigner’s consumer report. Section 1100F of the Dodd-Frank Act does not address whether, in this circumstance, the adverse action notice received by an applicant under the FCRA should include a guarantor or co-signer’s credit score. The Board does not believe, however, that Congress intended for an individual to receive another individual’s credit score. Section 609(f)(2) of the FCRA associates a credit score with a particular individual. The Board accordingly believes that a guarantor or co-signer’s credit score should not be disclosed to an applicant in an adverse action notice….” 76 Fed. Reg. 41590, 41597
As such, in these cases, the bank is not required to send an adverse action notice. However, if the bank decides to send an AAN to the guarantor nevertheless, then that decision would be pursuant to the bank’s own risk-based determination; with that said, it is worth noting that this could potentially cause unnecessary confusion, especially in business lending contexts where personal guarantees are relatively common, but not necessarily evaluative of personal creditworthiness – or, said differently, this could imply that the guarantor was considered the primary applicant if not sufficiently explained.
Moreover, when sending an adverse action notice – regardless to whom – the bank will want to ensure clear communication in line with the expectations of § 1002.9 (i.e. specific and accurate reasons for denial, etc.), similar in concept to adverse action notices being provided to co-applicants – and in the vein of privacy and customer relations concerns – the guarantor’s information should not be included on the applicant’s notice (or, said differently, each person should receive only their own information on their own adverse action notice).
Lastly – ever mindful of potential UDAAP/UDAP and / or fair lending risks – if the bank does decide to send adverse action notices to guarantors, then it should be sure to send such notices to all guarantors similarly situated. As always, if you have any other questions or concerns, feel free to reach out to us on the Compliance Hub Hotline.