ABA Banking Journal - September 2007 - (Page 56)
Compliance Clinic EPN E MIB X X A D D AL O Adverse action clarified The May Mailbox contained a question titled, “Can’t act adversely if you don’t sell what the customer wants.” The question addressed Regulation B [12 CFR 202.2(c)(iv)] and adverse action. The question asked if the bank was required to provide an application to a potential applicant inquiring about a sevenyear car loan where bank policy did not allow amortization to run that long. We stated that the bank could simply inform the customer that this was not a “type” of credit offered, and not supply an application or provide an adverse action notice. A clarification is in order. This question and answer blend two separate parts of the Reg B analysis: 1. when an inquiry becomes an application, and, 2. differentiating between type of credit and terms of credit when determining if an adverse action notice is required. of credit do not require a lender to give an adverse action notice to the borrower, unless the lender treats the inquiry as an application, as discussed below. Informing a borrower that a sevenyear car loan is not offered by the bank is not adverse action at this phase of the process. Most consumers have no interest in filling out an application for something the bank doesn’t offer. An inquiry becomes an application when the creditor evaluates information about the consumer, decides to decline the request, and communicates this to the consumer. In that case, the creditor has treated the inquiry as an application and must then comply with the notification requirements under Sec. 202.9. Whether an inquiry becomes an application depends on how the creditor responds to the applicant, not on what the applicant says or asks. The commentary to §202.2(c)(2)(v)1 states that when it comes to adverse action, there is a difference between terms of credit versus type of credit offered. It states that when an applicant applies for credit and the creditor does not offer the credit terms requested by the applicant (for example, the interest rate, length of maturity, collateral, or amount of down payment), a denial of the application for that reason is adverse action (unless the creditor makes a counteroffer that is accepted by the applicant) and the applicant is entitled to notification under §202.9. What actually happened? First, one needs to decide whether the scenario presents an inquiry or an application. Only after there has been an application does the adverse action issue turn on whether the denial has to do with a “type” of credit you do or do not offer. The Regulation B Commentary recognizes that applicants often seek information before deciding to apply. This is the “shopping phase” of the loan process, when the applicant will generally inquire about rates, terms, product availability, and collateral. The commentary gives examples of “inquiries” that are not “applications.” Among the examples are cases when a consumer calls to ask about loan terms and an employee explains the creditor’s basic loan terms, such as interest rates, loan-to-value ratio, and debt-to-income ratio, or when a loan officer only explains to a prospective homeowner the creditor’s loan-to-value ratio policy and other basic lending policies, without telling the consumer whether he or she qualifies for the loan. At the “inquiry stage,” answers to questions about the terms Leslie Callaway, CRCM, contributing editor, works with ABA staff experts to provide answers to ABA member bank questions. Submit your questions to Leslie at email@example.com 56 SEPTEMBER 2007/ABA BANKING JOURNAL Exploring the implications Consider the following two scenarios. In each scenario, a consumer walks into the branch and asks if the bank makes usedcar loans. You say that you do. In the first scenario, the consumer asks for an application in order to apply for a loan to purchase a 1975 AMC Gremlin. Your bank’s policy is that it only makes used-car loans for cars not more than seven years old. You inform the consumer of this, and the consumer leaves the bank without taking an application form. Is an adverse action notice required? No, because the consumer simply made an inquiry about obtaining credit on terms not offered by you, but never applied for credit on those terms. In the second scenario, the consumer asks for an application and takes the application without further discussion. When the
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