Can someone shed some light on the following?

Who gets the Adverse Action Notice with regard to the following scenario:

An Entity named ABC is applying for a Commercial loan. The property is mixed use and has 10 residential units and 1 retail unit (not sure if this is relevant).

There are two 50/50 owners of ABC Corp. that will sign the loan documents on behalf of the entity and be the key principals. We pull credit reports on both after they complete a fair credit authotization.

We find that the credit is below bank standards and application is denied due to credit. Are we required to send an Adverse Action Notice to the key principals/owners?

if the borrower is the entity, you send the adverse action to the entity - of course addressed to the principals representing the entity.

Are we required to send an Adverse Action Notice to the key principals/owners?

No - they are not applicants.

Just a question: If they were not going to be required to guarantee the loan, why would you pull credit on them in the first place?

Not sending the adverse action notice would be in compliance with FCRA?

I thought that the FCRA Adverse Action Notice Requirement applies whenever you obtain a consumer report, without regard to whether the report is for a consumer or a business purpose loan.

You are not taking adverse action against the individuals as they are not applicants for the loan - the entity is, unless they applied jointly?

For commercial loans:

>A report on a business entity is not a consumer report subject to FCRA disclosures. Regulation B adverse action notices do apply.

>If a commercial purpose loan is being denied due to poor credit of a guarantor, no disclosure or adverse action notice is needed for the guarantor. 

>In the Regulation B adverse action notice to the business, note lack of credit strength of guarantor (or similar language) when denying credit due to weak guarantor.

>If the bank obtains a consumer score on a guarantor in a commercial (or consumer) transaction, there are no disclosures.

>If the bank obtains a consumer score on a borrower or co-borrower in a commercial transaction, the FCRA rules apply. If the bank is ordering an ordinary consumer credit report on a consumer borrower for a commercial transaction, you should be receiving the same report with disclosures as on a consumer purpose loan.

>No adverse action or FCRA notice to a guarantor is required (only to an individual who is a borrower on a business purpose loan).

If we have a commercial credit to the two partners, pull a credit report on each and deny the application based on the credit of one of the partners, is it correct that one adverse action would be generated and the adverse action reason would be due to the credit of one of the partners? I believe I had read awahile back that there is no presumption of privacy in this case, but cannot remember for sure. Could another option be to create two adverse actions? One to the partner with the poor credit with the required credit score, etc. disclosures, and a second to the other partner referencing the "failure to meet our credit standards"?

Thanks

The FRB in 2003:

9(b)(2) Statement of specific reasons

Section 202.9(b)(2), adopted as proposed, clarifies that whether a creditor’s denial of credit is based on the creditworthiness of the applicant, a joint applicant, or guarantor, the reasons for adverse action must be specific. For example, a general statement that “the guarantor did not meet the creditor’s standards of creditworthiness” is insufficient.

The legislative history of the requirement to provide specific reasons for adverse action indicates that the purposes of the disclosure are to help achieve the antidiscrimination goals of the ECOA and to educate and inform consumers. These dual purposes are served by the clarification in § 202.9(b)(2). For example, the disclosure may discourage a creditor from discriminating based on a co-applicant’s or guarantor’s race, sex, age, or other prohibited basis. Also, the disclosure may help educate and inform applicants, co-applicants, or guarantors as to reasons for denial that are not apparent from looking at their credit report.

Many commenters were concerned about the co-applicant’s or guarantor’s privacy when the reasons for adverse action pertaining to creditworthiness are given to the primary applicant. When a person agrees to be a co-applicant, guarantor, or similar party, however, there is (or should be) a general understanding that information will be shared. Accordingly, the rule has been adopted as proposed.

"failure to meet our credit standards" is never ever a valid denial reason.

Thanks for this. So I understand you to mean that we should prepare an adverse action to both applicants in which we would provide the specific reason for that adverse action, which would be poor payment history by co applicant. I believe we would have to include the credit score disclsures required by FCRA since the decison was based on information on the credit report? Or in the alternative, one adverse action to each applicant. On the one for the applicant with poor credit, the reason would be poor payment history and his credit score. On the adverse action for the othe rappkicant, we would indicate poor payment history of co applicant. I cannot remember the exact title of the "poor payment history" box on the model adverse action form. Thanks

We denied a loan application for a commercial customer based on their debt service coverage and the credit history of the guarantors (based on the guarantors credit report). Should we mark the box that says our decision was based in whole or in part on information we obtained from a credit reporting agency? Our internal auditors are indicating that this box needs to be checked. Our compliance consultant is sayint that the box doesn't need to be checked because the FCRA’s requirements for adverse action notices apply only to consumer transactions and are designed to alert consumers that negative information was the basis for the adverse action. The FCRA only applies to consumer transactions, so adverse action notices are not required under the FCRA for business transactions. Neither has provided a citation, and I cannot find one in either reg that specifically addresses this. Can someone point me in the right direction?

A business applies for a loan.
You require the loan to be guaranteed by individuals.
The individual do not have the strength to support the transaction.
You deny the business - not the individuals.
What adverse action notice are you referring to that would have that box marked? There were no credit reports pulled on the business to which you send the notice.

We voluntarily send an ECOA notice of action taken to the business.

The notice we sent states"our credit decision was bsaed in whole or in part on information we obtained frmo an affiliate or from an outside source other than a consumer reporting agency. Under FCRA you have the right to make a written request no later than 60 days after you recevie this notice for disclosure of the nature of this information".

The auditors are saying the notice should have said "our credit decision was based in whole or in part on information obtained in a report from the consumer reporting agency listed below. Under FCRA you have the right to know the information contained in your credit file at the consumer reporting agency. The reporting agency played no part in our decision and is unable to supply specific reasons why we have denied credit to you....."

Both are wrong.

Can you point me to where in the regulations it specifies what would be correct?

You don't make a FCRA disclosure. It does not apply to the business to who applied for the loan and was denied. The individuals were not applicants.

Thanks Randy for the clarification. I found an article that explains the differences in the requirements:

https://consumercomplianceoutlook.org/20...nder-ecoa-fcra/