In our recent Adverse Action webinar, the following questions came up. We provide them and the accompanying answers for your edification.
What reason for taking the adverse action should the bank use if the applicant is 18 years old and has no credit history?
I would probably choose “no credit file” or “limited credit experience” as the box to check on the Reg. B form. Whichever you choose, your institution should be consistent in using the same reason in like circumstances.
Can you be more specific on what a completed application is and when it is “received”?
Except for “Will you marry me?”, “Is this beer free?”, and “Where’s the bathroom?”, these are two of the more important questions asked, with regard to Reg. B.
12 CFR 1002.9(a) requires a creditor (YOU) to notify an applicant (THEM) of action taken within 30 days after receiving a completed application concerning the creditor's approval of, counteroffer to, or adverse action on the application.
For Reg. B purposes, a completed application occurs as soon as a creditor has everything that it needs to make a credit decision. What information is needed to make a credit decision? The financial institution gets to decide, within reason, what it needs to make a credit decision. Generally, and depending upon the type of loan, any of the following information would be deemed reasonably necessary in making a credit decision: evaluation of credit history (consumer report or bank history), verification of collateral value (appraisal or other form of valuation), verification of income (paystub, tax return, profit and loss statement), verification of identity of applicant (driver’s license, documentation of existence of entity), determination of likelihood of repayment (cash flow analysis), etc. The loan application is most often a process; not just a document.
It is usually much easier to obtain the information necessary to make a credit decision for a consumer loan request than for a business or ag loan request. Once in a while, an applicant will have everything that the bank needs to make its credit decision at the same time the application is provided. When this occurs, bells ring in heaven and all the world is right. Usually, though, the application process is more prolonged and the information needed to make the credit decision comes in in bits and pieces (a 2011 tax return today; the 4th Quarter 2012 P&L a couple of weeks later; the appraisal three weeks later) until finally, the lender has all the information needed to make the credit decision. Now that you have the stuff, make the decision because Section 1002.2(f) requires that the institution “exercise reasonable diligence” in obtaining the required information. Unlike the fragrance of Mr. Too-Much-Cologne-Wearer after walking through the bank lobby, the completed application should not linger long. In other words, git’r done ‘cause that 30-day clock is tickin’!
Unfortunately, obtaining completed applications often take time, and therein lies the rub. Bank determines the completed application was received on date X; Examiner determines the completed application was received on date Y; Adverse action notice sent on date Z. Per the bank, date Z is timely; per the examiner, date Z is out of compliance. And this brings us to our next question.
What is the best way to document when a bank has a completed application?
The best way is the way the works best for the bank. I shamelessly plug our imaging system software, Bank Manager, as an excellent and affordable tool to document what you have and when you received it. A manual or computerized log for documents received and the process of the application also has merit. Time/date stamps to record when “this stuff” came to the bank is another means. Whatever method the bank chooses, make sure that the method fits the bank’s loan process, or it will be forgotten like yesterday’s convenience-store sandwich that you find way stuck way back in the corner of the refrigerator about six weeks after the “best by” date on the wrapper. Now that you have a completed application that was received, finally, on April 1, 2013, the credit decision needs to be made and, if adverse to the applicant, the notice must be sent within 30 days of April 1st.
In the Adverse Action Webinar this morning you stated that the adverse action notice should reflect the dollar amount. Is this a requirement to have the dollar amount on the denial, or if you put the dollar amount on the denial just make sure the amount is correct?
The dollar amount isn’t required to be shown on the AAN, but some loan operating systems input it as a means of further identifying the application. So long as the transaction for which the applicant applied is adequately identified on the AAN (by name, date, purpose, amount, etc.), the bank is in compliance with the Regulation. My point was that information that is input on the AAN should match what is on the application and in the file.
What should we do when an adverse action notice is not provided with the time limits?
Some compliance officers, and examiners, will want the responsible party put in stocks in the public square and a scarlet “L”, for LOSER, branded on their forehead. A better solution, however, is to document the error (AAN didn’t get sent to applicant timely), how it occurred (employee didn’t understand procedures, bank has no procedures, short-staffed due to vacation and inadvertent error), and what was done to make sure that the same error doesn’t happen again (provided training, changed procedures). Something like the following could be memorialized in the minutes of the compliance committee or Compliance Officer’s report: Discovered 2 instances where adverse action notices were not provided timely – Jones, application date 01/02/13; Smith, application date 03/04/13. Supervisor of department was notified and Bank procedures were reviewed with employee. Incident appears to be an isolated error due to employee being new to the department and not a systemic issue. Adverse action notices will be reviewed monthly for the next 60 days to verify that error is not being repeated.
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