The CFPB recently published a circular reminding financial institutions that no matter how the bank arrives at the decision to deny an application, the requirement of the Equal Credit Opportunity Act (ECOA / Regulation B) to provide the applicant with either a statement of specific reasons or a disclosure of the applicant’s right to a statement of specific reasons still applies for denied applications.
Institutions have more data available than ever to aid them in making lending decisions. Many institutions choose to have computer software help them in making these decisions. Some of these computer software models use complex algorithms that are not well understood by anyone but the developer, leaving institutions with decisions, but without supporting reasons. As the CFPB has pointed out, this lack of understanding by institutions, of the models used, does not relieve the institution from providing the reasons for denial.
ECOA protects credit applicants against discrimination. To help ensure a creditor does not discriminate, ECOA requires that institutions provide an adverse action notice when an application is denied. Part of the requirement of adverse action notices include specific and accurate reasons for adverse action being taken.
ECOA/Regulation B have different requirements when sending adverse action notices to consumers and business applicants. Business applications also have different requirements, based on the gross revenue of the business applicants.
Consumer adverse action requires: 1) a statement of the action taken in writing, 2) the name and address of the creditor in writing, 3) the ECOA notice (which includes a statement of the provisions of section 701(a) of the Act and the name and address of the institutions Federal regulator) in writing, and 4) either: a statement of specific reasons for the action taken in writing or a disclosure of the applicant’s right to a statement of specific reasons for the action taken in writing.
Commercial adverse action (gross revenues of $1million or less): 1) a statement of the action (oral or in writing), and 2) disclosure of the applicant’s right to a statement of reasons in writing (may alternatively be given in writing at the time of application, if the ECOA notice (which includes a statement of the provisions of section 701(a) of the Act and the name and address of the institutions Federal regulator) is also given in writing at the time of application)
Commercial adverse action (gross revenues in excess of $1million): 1) a statement of the action taken (oral or in writing), and 2) if the applicant makes a written request within 60 days of the statement of action taken, a written statement of the reasons for adverse action and the ECOA notice (which includes a statement of the provisions of section 701(a) of the Act and the name and address of the institutions Federal regulator).