Mortgage Concepts: How to issue the adverse action notice

Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators. This video discusses guidelines for issuance of the adverse action notice/notice of action taken under both the Equal Credit Opportunity Act (ECOA) and Fair Credit Reporting Act (FCRA). For course credit toward renewing your NMLS license, visit firsttuesday.us.

If the loan is denied, instead of approved, the FCRA requires the loan originator to disclose the adverse action.

Differentiating from the ECOA notice of action taken

The FCRA requires any loan originator who takes adverse action against a consumer based on any information contained in a consumer report to provide the consumer with an adverse action notice. Recall from the last unit that the ECOA also requires an adverse action notice (called the notice of action taken). The disclosure requirements are both based on an adverse action, but the required disclosures are not the same!

The ECOA requires an adverse action notice any time credit is denied, terminated or changed in a way unfavorable to the consumer. The notice of action taken under the ECOA requires disclosure of the specific reasons for denial of credit. The ECOA’s notice of action taken, taken together with demographic information required to be collected under the ECOA, is used to determine whether a pattern of unlawful discrimination exists.

In contrast, the FCRA’s adverse action notice is based on a denial, termination or unfavorable change in credit extended in connection with the use of consumer credit information. The FCRA’s adverse action notice does not require specific reasons for a denial of credit, but requires a disclosure of factors which negatively impact the credit score used in the credit decision. The purpose of the FCRA disclosures is to make consumers aware of the credit information used, so that they may dispute any inaccuracies.

The disclosure requirements of each are independent of one another, although most loan originators and lenders provide the disclosures on the same form, and/or at the same time. The ECOA Regulation B Appendix even provides a sample form fulfilling disclosure requirements for both laws. For residential mortgage loans, both disclosures will apply.

Adverse action triggering the disclosure

The definition of an adverse action under the FCRA is the same as the definition of adverse action under the ECOA:

For mortgage origination purposes, an adverse action is any denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested. [15 USC §1681a(k)(1)(A); 15 USC §1691(d)(6)]

An adverse action does not include:

• the refusal to extend additional credit under an existing credit arrangement where the applicant is delinquent or otherwise in default; or
• the refusal to extend additional credit which would exceed a previously established credit limit. [15 USC §1691(d)(6)]

Timing for notice

The FCRA does not set a specific timeline for providing the adverse action notice to the consumer. However, the ECOA requires the notice of action taken to be provided within 30 days of receipt of a completed loan application. Since the FCRA and ECOA adverse action notice disclosures are typically sent in the same document, the 30-day timeline is a good rule of thumb.

FCRA disclosures required

An individual who takes an adverse action against a consumer based on information found in the consumer’s credit report provided by a consumer reporting agency must provide:

• the credit score, or credit scores upon which the adverse action is based;
• the range of possible credit scores under the model used;
• the date the credit score was created;
• the name of the person or entity that provided the credit score; and
• up to four key factors that adversely affected the credit score (five, if one of the key factors is the number of inquiries);
• the name, address and telephone number of the consumer reporting agency that furnished the report to the individual taking the adverse action;
• a statement the consumer reporting agency did not make the decision to take the adverse action and is unable to provide the consumer the specific reasons why the adverse action was taken;
• a disclosure of the consumer’s right to receive a free copy of the consumer report upon which the adverse action is based within 60 days of the receipt of the notice; and
• a disclosure of the consumer’s right to dispute the accuracy or completeness of the information contained in the consumer credit report. [15 USC §1681m(a); 15 USC §1681g(f)(1)]

When an adverse action is taken based on information from an outside source other than a consumer reporting agency, a creditor must provide the section 615(b) disclosure. This rule also applies when the creditor obtains information from an affiliate other than a consumer report or other than information concerning the affiliate’s own transactions or experiences with the consumer. [12 CFR § 1002.9]