Since being implemented by Regulation B, the Equal Credit Opportunity Act (“ECOA”) has required banks to provide applicants with notice of the bank’s credit decision in response to a credit application. Although the notice requirements differ for commercial applicants, ECOA outlines that, if a bank is denying an application for credit, then, regardless of if the request is consumer or commercial purpose in nature, the bank is required to have specific reasons supporting the denial, and these reasons should not be based in any of ECOA’s “prohibited bases”. While many of us may be familiar with the requirement to provide notice under Regulation B, in recent years, there has been guidance issued by the Consumer Financial Protection Bureau (“CFPB”) underscoring the importance of, not only issuing these required notices, but also maintaining sufficient documentation to establish that the bank is fulfilling their obligations in offering specific and accurate reasons for the denial of a credit request.
As the spotlight surrounding banks’ adverse action requirements continues to be a point of comment for examiners, it is critical that banks ensure that they have sufficient documentation to evidence their compliance with the requirements of the rule.
The CFPB’s circular, Consumer Financial Protection Circular 2023-03: Adverse action notification requirements and the proper use of the CFPB’s sample forms provided in Regulation B, (the “Circular”), addresses the specificity requirements in support of a denial or adverse action. The Circular suggests that, since it is unlawful for a bank to not provide a statement of specific reasons for the action taken, a bank would not be in compliance with ECOA’s requirements if they are utilizing reasons that are “overly broad, vague, or otherwise fail to inform the applicant of the specific and principal reason(s) for an adverse action.” As such, while banks are free to utilize any reasoning for a denial or adverse action occurring, so long as this reasoning would not seem to stem from any of the prohibited bases under Regulation B, of course, banks must ensure that their reasoning is documented with sufficient specificity to meet the expectations under the rule and be able to demonstrate such to examiners.
The Circular further outlines that, while the use of the example denial reasons and the sample forms within Appendix A of Regulation B is appropriate in certain circumstances, banks should be mindful that the use of the example reasons will only satisfy these requirements if the reason selected actually addresses the principal reasons for the action being taken. As, although the sample forms offer a demonstrative list, this list is non-exclusive, and the Circular suggests that “[i]f the reasons listed on the forms are not the factors actually used,” then the bank will not meet the requirement of the rule by simply selecting the closest “identifiable” reason listed in the Appendix. Instead, when the reason for the denial does not seem to be encompassed in any of the sample reasons within the Appendix, then the bank can fulfill this obligation by utilizing the “other” option on form to state the specific reason actually considered in making the denial. By using the “other” option on the form when the reasoning for the denial is not one of the examples, a bank can ensure that they are documenting the actual reasoning applied in evaluating the application for both the applicant and any examiners down the line.
Finally, the Circular points out that, while this new guidance may provide additional context on regulators’ expectations for the specificity of the reasons offered, these obligations stem directly from the language of the Regulation. As Regulation B directly states that, providing that a bank’s reasoning that a denial was based on “the creditor’s internal standards or policies or that the applicant, joint applicant, or similar party failed to achieve a qualifying score on the creditor’s credit scoring system”, alone, are insufficient to fulfill these requirements. Thus, the Circular contends that, even if the reason for the denial is based in any of these internal guidelines, the aspect of the internal guidelines warranting the denial must be communicated and documented with specific detail to ensure that the basis behind the decision is evident to the applicant, as well as any examiners that may evaluate such down the line.
Ensuring that the bank has sufficient documentation to support the reasoning behind a denial is critical for a bank to not only be able to demonstrate compliance with ECOA’s requirements to examiners, but also to improving the credit status of that individual applicant. As such, banks will want to evaluate their current documentation processes for making a credit decision to ensure that these procedures are robust enough to satisfy these expectations. As always, if you have any other questions or concerns about adverse action notices, feel free to contact us on the Compliance Hub Hotline.