While Regulation B aims to prohibit discrimination in credit transactions, it also contains requirements throughout the credit application process including the timing of credit decisions and sending out adverse action notices. Some common practices banks take through the credit application process are both prequalification and preapproval requests. While both occur in similar times during the application process, the regulation may treat them differently depending on the circumstances. Whether a prequalification or preapproval request is subject to Regulation B’s adverse action requirements depends on whether the potential borrower’s request amounts to an application.
Ultimately, how the creditor responds to the consumer determines whether an inquiry or prequalification request becomes an application for Regulation B purposes. While giving information about loan terms to a consumer is encouraged by the commentary, if the creditor evaluates the consumer’s information, declines the request, and communicates it to the consumer, then the creditor has treated this as an application and would have to comply with the adverse action requirements.
Whether Regulation B treats a preapproval request as an application also depends on what the creditor does. The commentary to Regulation B includes an example where a person asks a bank to preapprove a loan. In the comment, the bank reviews the request and provides a written commitment, valid for a specific timeframe, to extend a loan for a specified amount. The commentary tells us that the creditor may only subject its offer to certain conditions in these written commitments. These conditions include identifying collateral and requiring no material change in the applicant’s financial condition or creditworthiness. If there is not a written commitment, as described above, the regulation treats the preapproval request as a prequalification request. This comment also tells us that if a creditor evaluates a person’s creditworthiness as a part of a preapproval request and determines that the person does not qualify for preapproval, then the creditor treated this as an application, making it subject to adverse action requirements.
Adverse action requirements also come into play when considering incomplete prequalification or preapproval requests, assuming they meet the bank’s definition of application. A creditor must either deny the request or send the applicant a notice of incompleteness requesting the information needed within 30 days of receiving the request. For preapproval requests, a creditor can deny the application or request additional information. A denial would trigger the need to provide an adverse action notice. However, the bank would not need to provide a notice of incompleteness.
As a reminder, an adverse action notice should be in writing, contain a statement of the action, name, and address of the credit, provisions of 701(a) of ECOA, the name and address of the bank’s federal regulator, and either: (1) a statement of specific reasons for the action taken; or (2) a disclosure of the applicant’s right to receive a statement of specific reasons within 30 days if it is requested within 60 days of the bank’s notification. Be sure to check out our Regulation B toolkit for helpful resources.