Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators. This video covers when a loan is denied, instead of approved, how the FCRA requires the loan originator to disclose the adverse action. For more information, see Part 2.
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Differentiating from the ECOA notice of action taken
The Fair Credit Reporting Act (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 that the Equal Credit Opportunity Act (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.
Related article:
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. [12 CFR. §1002.9]
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.
