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Adverse Action Notices - Time for a Refresher

Adverse Action Notices -
Time for a Refresher

by Sam Ott and Mary Beth Guard

Think back over the last year and a half and try to get a sense for how many loan applications your institution denied during that period of time. It can be tough to say no, and it's never fun to communicate a negative decision to a borrower. It's best for everyone to get it done and move on. But imagine that due to faulty training, procedural glitches, or for whatever reason, some or all of the applicants were either not given adverse action notices under the Equal Credit Opportunity Act and Reg B, or were given inadequate notices. What happens then?

Under a consent order entered into this month between the OCC and Guaranty National Bank of Tallahassee, it means the bank has 60 days to search its records for the last year and a half to identify loan applicants that never received, or who had received inadequate, adverse action notices. The bank must then send new notices to the affected applicants within seventy-five days from the date of the Enforcement Order.

Ouch! Can you fathom what it would be like to be someone who unsuccessfully applied for credit at that institution? It's bad enough to get turned down, but to have the negative experience resurrected months later when you get a notice out of the blue would seem to add insult to injury.

Why would the regulators require such a thing? Because the adverse action notice is an important document that gives a would-be borrower valuable insight into the decision making that resulted in the turndown. If the turndown was based upon information incorrectly reported to a credit reporting agency, for example, the applicant can seek corrective action. If an identity thief has sullied an individual's credit, an adverse action notice might be their first opportunity to learn of the fraud. If the applicant needs to reduce other debt, or pay attention to making timely payments, that's helpful information as well.

We think this most recent enforcement order serves as a good reminder of the importance of adverse action notices, and now would be a good time for a quick review within your institution to ensure they're being properly completed and given when they should be to whom they should be.

Both ECOA and the Fair Credit Reporting Act have provisions that mandate the providing of adverse action notices. The two requirements are not identical, and it is important to for your employees to understand when each comes into play and the differences between the two requirements. [The violations discussed in the Enforcement Order result from the failure of the bank to follow the ECOA requirements.]

Here, to help you, are links to the regulatory requirements, along with a wealth of BOL articles, guru Q&As and Threads on the subject of adverse action notices.

Statutory/Regulatory Provisions

BOL Articles

Guru Questions


First published on 05/22/03

First published on 05/22/2003

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