Would this be considered adverse action? The bank has a booth at a Home Buying Fair. A person comes up and starts talking to one of our MLOs about our home loan offerings. The person says he has a bankruptcy and asks how that would affect his chances for a loan? And the MLO says we would decline based on a bankruptcy. Do we owe an adverse action?

YES

From the commentary to definition of Application in ECOA

" A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the notification requirements under §1002.9. Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks. "

The correct answer depends on all the facts (which include more than we know up to this point), but I'm leaning toward "NO." Rocky's correct to look for the answer in Reg. B's definitions--a tangle of interconnected rules.

For there to be "adverse action" in connection with a new extension of credit, an "applicant" must request "credit" via an "application." An "application" is an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor.

Did the home-buying-fair attendee request an extension of credit, or was the conversation "what-if?" in nature? Does your bank have a formal procedure which your MLOs must follow when they are taking applications? Was that procedure being followed in the instance under discussion?

If this really was a sudden death mini application handled orally, then I agree with "YES"...but strongly recommend that such a loose procedure needs considerable improvement.

Depending on your standard answer to such a question, whether it is adverse action or not is fact based, but such a direct and blunt statement most likely is discouraging an application. Just hope it is not based on a prohibited basis.

Paragraph 4(b)

1. Prospective applicants. Generally, the regulation's protections apply only to persons who have requested or received an extension of credit. In keeping with the purpose of the Act—to promote the availability of credit on a nondiscriminatory basis—§1002.4(b) covers acts or practices directed at prospective applicants that could discourage a reasonable person, on a prohibited basis, from applying for credit.

Plus, they say they had a bankruptcy. When was it? Last year or ten years ago. What were the factors and are there any other mitigating factors that you have ever used to approve a single application in your bank with someone that has had a bankruptcy? The proper answer would be - "here, take this application and complete it fully and like us take a look and see what we might be able to do".

The person says he has a bankruptcy and asks how that would affect his chances for a loan? And the MLO says we would decline based on a bankruptcy.

The customer inquired about a mortgage loan. Informed the loan officer they filed bankruptcy. The loan office states that based on that fact the loan request would be denied. How did the inquiry not become an oral application?

"Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks. "

The creditor told the consumer upon their inquiry that they would not qualify due to the bankruptcy. How is that not adverse action?

To quote Randy: "The proper answer would be - "here, take this application and complete it fully and like us take a look and see what we might be able to do"."

That's what should have been done but it's not what was done. IMHO based on the response provided to the consumer's inquiry by the MLO there was Adverse Action.

I agree with Dan for all of the reasons he stated.

Further, the main point of this quote (bolded part) is that the MLO did not properly follow the creditor's procedures. For there to be "adverse action" in connection with a new extension of credit, an "applicant" must request "credit" via an "application." An "application" is an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor.

We only have the facts stated in the original post and they don't paint a complete picture of what happened. More information would help us fit the regulation to the facts. What we do know is that this was a casual setting designed to provide information to numerous potential homebuyers and help them decide whether or not they want to pursue homeownership. It was neither the time nor the place for a potential homebuyer to request/apply-for credit nor for a lender to evaluate a credit request in the manner (we can only hope) the bank's policy required.

If the bank has a hard policy regarding bankruptcy and announces this standard, there's little difference from the bank representative announcing a policy that all applicants must be at least 18 years of age. These are general inquiries about credit policies and standards, not specific requests for credit.

Dan's OI quote is somewhat out of context. The full comment envisions a request for credit (red highlight) followed by a credit decision. The remainder of the comment adds no additional facts--it only interprets and summarizes.

"A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the notification requirements under §1002.9. Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks."

The related issue of discouragement on a prohibited basis should be mutually exclusive from the issues of what constitutes a request/application and when there is adverse action.

Given the amount of discussion this post has generated, it would make a good topic for staff training on these subjects. If existing policy and procedure does not spell out what the bank considers to be an application, that is a weakness that should be addressed. Once there is a bright line test separating discussion from application, effective procedures will be much easier to follow.

I'm just shocked you had an LO come back from an event like this and ask if they needed to send out an AAN