I'm looking at a denied loan for individual credit to consolidate debt. A vehicle was to be taken as an abundance of caution. In underwriting, we consider this "unsecured"--it's given the higher unsecured rate, no value is given to the collateral, LTV is not documented, we do not check on insurance/title/etc.

That being said, for the purposes of Reg B, should marital status have been collected in this case? Or is it considered individual unsecured?

For the record, the application did show marital status. Also, one of the reasons for denial was "value or type of collateral insufficient." Somethings wrong here, but I'm not sure what.

How do you deny for insufficient collateral when the vehicle was to be taken as 'abundance of caution'. Generally for loans with collateral taken as AOC the customer qualifies with an unsecured loan.

The loan was to be secured so I don't seen an issue with collecting marital status.

I asked that same question to the underwriter. We've had several issues with the reasons used on AANs, but it's often hard to make your case when they just feel "this is the way it's always been done."
I've filed it in my "wonky AANs" folder that is ever growing.

Thanks for the help!

I'm with Skittles. Questions:
1. How do you have collateral, yet consider it an unsecured loan?

2. How do you justify giving the unsecured rate on an unsecured loan?

To your question: Refer to §1002.5(d)(1). If the applicant applies for secured credit, you MAY inquire about marital status, but aren't required to do so.

(d) Other limitations on information requests—(1) Marital status. If an applicant applies for individual unsecured credit, a creditor shall not inquire about the applicant's marital status unless the applicant resides in a community property state or is relying on property located in such a state as a basis for repayment of the credit requested. If an application is for other than individual unsecured credit, a creditor may inquire about the applicant's marital status, but shall use only the terms married, unmarried, and separated. A creditor may explain that the category unmarried includes single, divorced, and widowed persons.

When I first asked about this loan, my question was-- "is this considered secured or unsecured?" I pointed to the rate being at the higher unsecured rate, but also that collateral was used as a reason for denial. One of those must be wrong. I don't see many AOC loans, so I wasn't sure. The answer I received was that, when the loan amt is below a certain threshold our policy is to use the unsecured rate. (This request wasn't below the threshold.) She tried to explain herself, but I wasn't satisfied with the response. We have a rate sheet that rarely fails, as it covers a wide range of scenarios, but loans secured as AOC aren't expressly stated on the sheet.

I just review these, so I can't explain her reasoning. When she explained it to me, it made no sense whatsoever. In my testing I considered it a failure because I did not agree with the reason.

I'm still trying to understand whether there is collateral, or not. The original post said "A vehicle was to be taken." Did you perfect a lien or not?

The loan was denied before ever reaching that stage.

OK, my bad. So then..the applicant offered a vehicle as collateral as part of the credit application?

Correct, the vehicle was offered as an abundance of caution. I'm not even sure what that terms really means.

AOC is a lender term, not a term an applicant would use. This returns us to the "secured? or unsecured" question. If there's no collateral offered on the application (plus any supplements) submitted by the applicant, then this is an application for unsecured credit and Reg. B applies accordingly.

Richard is correct. AOC is a lender term with credit/underwriting implications; whereas you place NO VALUE on the collateral and therefore underwrite as unsecured, however lien perfections must still take place. Collateral taken as an AOC is still a SECURED loan/application for regulatory purposes. If an AAN was sent due to insufficient collateral, in essence you have nullified the "AOC" on the loan.

Now, with that said, you stated that the AOC was on a "vehicle", which I'm assuming a car? If that's the case, I've never seen a loan with an AOC on a car and would question why this is happening. In ALL cases that I've seen, AOC is taken on Real Estate, typically for tax write-off purposes. (e.g. Customer qualifies for an unsecured loan, but wants the tax write-off benefit; therefore he/she pledges his home as AOC and doesn't have to pay for the appraisal fee)

I agree with Richard and awilli, but want to add one correction: You can take collateral and not perfect. It's still security on the loan. You don't have to file a lien. If I take a car title as collateral, the loan is still secured and need to disclose it as such. I just haven't perfected the collateral.

Thanks for the clarification David. Quick follow-up... So if I take an AOC on a customer's home, do I have to file a mortgage/DOT on the property?

Since the event under discussion was a declined application, not a consummated loan, you never get to the point where the title is actually pledged. All you can review is the applicant's intent--as evidenced by the completed credit application. Either the applicant offered the vehicle or s/he didn't.