Mortgages Analyzed
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Adverse Action Letter

What is an Adverse Action Letter?

Adverse Action Letter

Adverse Action Letter is a notification from the lender to the loan applicant(s) informing them of an adverse action on their loan application, such as decline of a loan application.

Decline Letter is a type of adverse action letter where the lender informs the loan applicant(s) of the lender’s decision to decline their loan application. Decline letter is the most common use of adverse action letter. The loan applicant(s) will have to apply elsewhere or restructure the loan to meet the lender’s guidelines. Decline letter is generally issued after the underwriter has made its decision to deny loan application.

When to Send Adverse Action Letter

Adverse Action letter must be sent when an adverse action is taken, which may include:

  1. A refusal to grant credit in substantially the amount or on substantially the terms requested in an application. For example, adverse action occurs when lender declines a mortgage loan application.
  2. A termination of an account or an unfavorable change in the terms of an account. However, adverse action does not occur if the termination or unfavorable change affects all or substantially all of a class of the lender’s accounts.
  3. A refusal to increase the amount of credit available to an applicant who has made an application for an increase. For example, adverse action occurs when the lender refuses to increase credit limit on a HELOC that the borrower applied.
Source :www.MortgagesAnalyzed.com

Contents of Adverse Action Letter

Adverse Action Letter should contain the information specified under Regulation B and Fair Credit Reporting Act (FCRA).

Content Requirements for Adverse Action Letter under Regulation B

§1002.9 of Regulation B require the adverse action letter to include the information listed below.

  1. Statement of Action Taken: The fact that the loan is declined.
  2. Lender’s Name
  3. Lender’s Address
  4. ECOA Notice, which contains a statement of the provisions of §701(a) of ECOA. This requirement is fulfilled by including the following text, as specified in §202.9(b)(1) of Regulation B, in the Adverse Action Letter:
    1. The federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant's income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The federal agency that administers compliance with this law concerning this creditor is [name and address of the appropriate regulatory agency].
  5. The name and address of the federal agency that administers compliance with respect to the lender. This is included in the last line of the ECOA Notice listed above. Office of the Comptroller of the Currency, Federal Reserve Bank, and HUD are some of the examples of the agencies that may regulate a lender.
  6. Either:
    1. A statement of specific reasons for the decline of loan application and must indicate the principal reason(s) for the decline. As per Regulation B, it is not sufficient to mention that the reason for decline was based on the lender’s internal standards or policies or that the applicant, joint applicant, or similar party failed to achieve a qualifying score on the lender's credit scoring system. The number of decline reasons should not be more than four.
      OR
    2. A disclosure of the applicant's right to a statement of specific reasons within 30 days, if the statement is requested within 60 days of the creditor's notification. The disclosure must include the name, address, and telephone number of the person or office from which the statement of reasons can be obtained. If the lender chooses to provide the reasons orally, the lender must also disclose the applicant's right to have them confirmed in writing within 30 days of receiving the applicant's written request for confirmation.
Source :www.MortgagesAnalyzed.com

Content Requirements for Adverse Action Letter under FCRA

§615 of FCRA require the adverse action to include the information listed below.

Adverse Action Based on Information Contained in Consumer Reports

If the adverse action, such as loan decline, was based on the information obtained from consumer reporting agencies (credit reports) then the Adverse Action Letter must include the information listed below. This is in addition to information required by Regulation B.

  1. A notice of the adverse action.
  2. Credit scores that were used in making the credit decision.
  3. The range of possible credit scores under the model used.
  4. All of the key factors that adversely affected the credit score of the applicant in the model used. The total number of factors should not exceed 4. If a key factor that adversely affects the credit score of an applicant consists of the number of enquiries made with respect to a consumer report, that factor should be included in the Adverse Action Letter without regard to the numerical limitation of 4 factors.
  5. The date on which the credit scores were created. This is generally the date of credit report.
  6. The name, address, and telephone number of the consumer reporting agency (including a toll-free telephone number established by the agency if the agency compiles and maintains files on consumers on a nationwide basis) that furnished the report to the lender.
  7. A statement that 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.
  8. A notice of the consumer's right:
    1. To obtain a free copy of a consumer report from the consumer reporting agency. The Adverse Action Letter should include a statement that the applicant has a 60-day period from the date of receipt of adverse action letter for obtaining such copy of consumer’s report.
    2. To dispute with a consumer reporting agency the accuracy or completeness of any information in a consumer report furnished by the agency.
Source :www.MortgagesAnalyzed.com

Adverse Action Based on Information Obtained from Third Parties (Including Affiliates)

The lender may take adverse action based on information obtained from third parties (including affiliates). The third parties may provide information that may be related to applicant’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.

In this case the lender must include the following information in the adverse action notice:

  1. A notice of adverse action.
  2. Notice to the applicant(s) informing them of their right to make a written request, within 60 days of knowing the adverse action, to obtain the reasons for adverse action. A sample language for the disclosure is included below.

    Notice: Our credit decision was based in whole or in part on information obtained from third parties other than a consumer reporting agency. You have a right to make a written request to obtain a disclosure of the nature of the information received from the third party. Your written request must be sent within sixty days from date of receiving this Adverse Action Letter.

Information obtained from third parties does not include information obtained from consumer reporting agencies.

Source :www.MortgagesAnalyzed.com

Additional Information

In addition to information required under Regulation B and FCRA, it is recommended to include the following information in the Adverse Action Letter:

  1. Date letter prepared
  2. Application number
  3. Applicant(s) name
  4. Subject property, if available
Source :www.MortgagesAnalyzed.com

Borrower's Considerations

Responding to an Adverse Action

The reason for adverse action may relate to low creditworthiness, inability to provide documents in a timely manner, mis-match between needs of the applicant and the product offered by the lender, or other reasons. You should understand the reason for adverse action and have a plan of action to address it. Read more about the steps you can take to address loan denial here.

Source :www.MortgagesAnalyzed.com

Lender’s Considerations

Designing Adverse Action Letter – Using Reg B Model Templates

There are 4 model forms in Regulation B, Appendix C. It is highly recommended to use these forms since they are designed to comply with the requirements of Regulation B and FCRA.

  • Form C-1—Sample Notice Of Action Taken And Statement Of Reasons. This form can be used when credit decision was based on information taken from a credit reporting agency or from an outside source, including affiliates.
  • Form C-2—Sample Notice Of Action Taken And Statement Of Reasons. This form can be used when credit decision was based on information taken from a credit reporting agency.
  • Form C-3—Sample Notice Of Action Taken And Statement Of Reasons (Credit Scoring): This form can be used when the you use that assigns a credit scoring system to evaluate loan application and also when the credit decision was based on information taken from a credit reporting agency.
  • Form C-4 - Sample Notice Of Action Taken, Statement Of Reasons And Counteroffer: This form can be used when you are making a counter offer and when you are making the credit decision based on information taken from a credit reporting agency or from an outside source, including affiliates.

Compliance with Regulation B: Forms C-1 through C-4 are intended for use in notifying an applicant that adverse action has been taken on an application or account by providing the specific reasons for the action taken. They comply with the notification rules under §§1002.9(a)(1) and (2)(i) of this part. However, these forms cannot be used if you do not intend to provide statement of specific reasons, and instead, intend to provide the applicant's right to a statement of specific reasons.

Compliance with FCRA: Form C-1 contains the Fair Credit Reporting Act disclosure as required by sections 615(a) and (b) of FCRA. Forms C-2 through C-5 contain only the section 615(a) disclosure. 615(a) disclosure is provided when you obtained information from a consumer reporting agency that was considered in the credit decision. 615(b) disclosure is provided when adverse action is taken based on information from an outside source other than a consumer reporting agency. In addition, a 615(b) disclosure is required if the you obtained information from an affiliate other than information in a consumer report or other than information concerning the affiliate's own transactions or experiences with the consumer.

Source :www.MortgagesAnalyzed.com

Timing of Adverse Action Letter

The timing for providing an Adverse Action Letter is prescribed in §1002.9(a) of Regulation B and depends on the circumstance of the loan as follows:

  • In General: Adverse Action Letter must be sent within 30 days after receiving a completed application.
  • Incomplete Application: If the loan was declined because the loan application was incomplete, then the Adverse Action Letter must be sent within 30 days from date when the decision to decline was made. However, a Adverse Action Letter is not required to be sent if you had earlier informed the applicant that the loan application is incomplete and had provided a notice that further evaluation of the application will not be given unless the requested information is provided within a specified time period. The document that informs the applicant that their application is incomplete is commonly known as Notice of Incompleteness.
  • Counteroffers: Instead of declining a loan, you may provide a counteroffer to the applicant reflecting different loan terms. If the applicant does not expressly accept or use the loan offered in the counteroffer then an Adverse Action Letter must be sent within 90 days after notifying the applicant of a counteroffer.
  • Existing Accounts: The Adverse Action Letter must be sent within 30 days after taking adverse action.
Source :www.MortgagesAnalyzed.com

Communicating Adverse Action Letter

Adverse Action Letter should be in writing for consumer loans. However, §202.9(d) of Regulation B provides that the loan denial may be communicated orally by a lender that did not receive more than 150 applications during the preceding calendar year. If the lender chooses to provide the reasons orally, the lender is required to disclose to the applicant that they have the right to have the decline reasons confirmed in writing within 30 days of receiving the applicant's written request for confirmation. Even though, the regulation provides an exception for small lenders, it is highly recommended to provide the Adverse Action Letter in writing.

For business purpose loans, based on circumstances and applicant’s size, the decline decision may be communicated orally or in writing.

Multiple Borrowers

When an application involves more than one applicant, the Adverse Action Letter can be given to any one of the applicants. However, the letter must be given to the primary applicant where one is readily apparent. As a best practice, it is recommended to provide Adverse Action Letter to every applicant on the loan application. However, a single Adverse Action Letter would suffice where the co-borrower is a spouse and has the same residence address, as long as the letter is addressed to both applicants.

Recordkeeping

The lender should maintain the Adverse Action Letter in its records for at least 25 months after the date when the lender notified the applicant of decline (action taken) on a loan application. If the lender provided a separate statement of specific reasons for decline then it must maintain such statement, along with the Adverse Action Letter, for at least 25 months from the date when the decline was notified to the applicant. The same requirement applies for declines on existing accounts.

For business purpose loans, the requirement is to maintain the Adverse Action Letter and Statement of Specific Reasons for a period of 12 months. However, Regulation B provides certain exceptions to the general record retention requirements that apply for business purpose loans.

Source :www.MortgagesAnalyzed.com
 

Document Summary

 
Adverse Action Letter
Purpose
Adverse Action Letter is a notification from the lender to the loan applicant(s) informing them of an adverse action on their loan application, such as decline of a loan application.
Use in Mortgages
The letter is used to inform the loan applicant(s) of the adverse action on their loan application.
Common Names
  • Adverse Action Letter
  • Credit Decline Letter
  • Denial Letter
  • Notice of Action Taken
  • Notice of Credit Denial
  • Letter of Credit Decline
  • Statement of Credit Denial
Type
Disclosure
Provided By
Lender
Provided To
Applicant(s) (Principal applicant, if readily identifiable)
Notarization Required
No
Signed By
Lender
Life Cycle Stage
Origination, Servicing
Recordkeeping
25 months from date of notification of action taken.
Model Form
There are 4 model forms in Regulation B, Appendix C
  • Form C-1—Sample Notice Of Action Taken And Statement Of Reasons
  • Form C-2—Sample Notice Of Action Taken And Statement Of Reasons
  • Form C-3—Sample Notice Of Action Taken And Statement Of Reasons (Credit Scoring)
  • Form C-4 - Sample Notice Of Action Taken, Statement Of Reasons And Counteroffer
Applicable Laws
CFPB Regulation B 1002.9. (12 CFR 1002.9), FCRA §615
Source :www.MortgagesAnalyzed.com

Updated: Feb 29, 2016

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Adverse Action Letter informs the borrower of loan decline or similar adverse action
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