Is it a VIOLATION OF LAW to send someone an FCRA notice indicating that their credit adversely affected our lending decision if it didn't?
This issue has reared its ugly head again because of the standard letters generated by our credit scoring system. If we process a joint application, and the primary applicant's credit is bad, they get the ECOA letter containing the FCRA notice. The co-applicant also receives a system generated FCRA letter telling them that the decision was based in whole or in part on their credit report. This is fine if it is true, but if the co-apps credit was good, this letter is misleading (and unnecessary!). The loan department wants to send it anyway, so I need to know if sending such a letter is a violation of law, or just a stupid way to do business.
Thanks!
Leslie
The opinions expressed here DEFINITELY do not reflect the opinions of my employer!!

The way I look at it, if the application is joint, then the decline is joint. We put BOTH (or ALL) applicant's names on the decline letter and send it out. If one applicant is at a different address, then we address the second letter, with both names, to the second address.

I have heard more than one opinion that when people apply JOINTLY, they become "joined at the hip" so-to-speak in the transaction. What happens to one, happens to all.

Afterall, if the credit was granted, then all joint applicants would be signing on the documents!

Bonnie,
We have always used separate AA letters to each applicant. Our old manual system allowed us to give the primary person whose credit was derrogatory a letter giving the reasons for the turndown. The second party received a letter stating additional reasons (if there were any) or a statement "co-applicant does not qualify". Our new system will not allow us to do that.
Back on 1/2/01, Lucy addessed this (actually from a comment from you!)stating that you can send a joint letter IF the credit statement letter is accurate as to each of the individual applicants. That leads me to belive that if it is not accurate for each (like they don't both have poor credit) then you can't do it that way. She also addressed this in Compliance Action Volume 5 Number 10 "FCRA Rears its Ugly Head", when addressing the issues surrounding the Stinneford letter. http://www.ftc.gov/os/statutes/stinneford.htm
I get all that, but what my lenders want to know is if sending incorrect information is illegal, and being able to tell them it is is going to be the only way I can stop it.

Let me break this down. Is it a violation to tell someone, something that isn't true? Yes, I think so. If I have a single applicant that applies for a loan & I pull a credit report that shows everythink is OK, but I deny them for value of collateral, I should not provide the FCRA info because it is not true. The purpose of the disclosure is for the customer to dispute any innacurate info. So now, I have a denied applicant that applies for a free credit report and finds out that nothing is wrong with their credit history. Have I done anything wrong? Just ask the credit reporting agency that had to send out a free credit report. I'm sure they will tell you yes.

Now, apply this to multiple applicants. By telling Customer A that "your credit report played a role in your failure to obtain credit from us" even though it was meant for Customer B is just as wrong. Here's how we put it in our manual:

If the credit report of the co-signer leads to the denial, the Fair Credit Reporting Act requires disclosure of this information to the co-signer. Therefore the bank needs to send two denials [one to the primary applicant(s) and one to the co-signer]. The primary applicant’s denial notice can state that the reason for denial is “Co-signer does not qualify” as well as the other reasons the primary applicant did not qualify. The co-signer’s adverse action notice should state specific reasons explaining how the credit report was used adversely.

This is very similar to a situation I'm reviewing. My shop is in the process of implementing a credit scoring system, which can automatically generate declination letters.

My biggest concern is that the system generates a seperate letter to the co-app stating that a credit report was obtained and that it "in whole or in part" influenced our decision. The lenders believe they ARE "in whole or in part" relying on the credit report because it factors into the credit score. What happens if the stated reason for declination doesn't relate to the credit report? Would this be a violation? Suppose the co-apps credit is okay: is there a problem giving them the letter? The person responsible says we don't have much leeway in modifying the letters.

Thanks,
Harold

My guess would be that you are using Fair, Isaac. I have been getting the same response from my lenders, along with the fact that FI won't stand behind the declination letters if we modify them. We made a list of reasons for declination (like inadequate income) that would have nothing to do with the credit score, but I got the same answer you did from the lenders.
I do not believe that the use of a credit scoring system necessarily means that every turndown is due to credit.I think it is a falacy to beleive that every turndown is credit related because we use credit scoring or pull a credit report!!!
The other issue we are addressing is that the system generated reasons for declination are actually reasons for a low credit score, but not always valid reasons under reg. B. However, the "standard" AA letter generated by the FI system does not disclose that a credit scoring system is being used. Therefore, we have AA letters with reasons like "residential status" as a reason for declination! What does that mean, that they rent instead of own, or that they live in a refigerator box under the overpass? Not real helpful to the applicant!
In case you can't tell, I am very frustrated by this. Lucy says we can't let a vendor dictate our compliance policy, but when you have invested as much time, effort and money into something, it is difficult say "get it into compliance, or trash it"!"
Leslie

As I stated above, I think this is a problem. Over disclosure is a violation in this case, just like not disclosing the use of a credit report. I remember when the FCRA was changed (1995) and the comments from CRA's were very strong that bankers should not report that they had pulled credit reports. Rather, bankers should only disclose the use of a credit report is something in the credit report led to the denial of the applicant. They (CRA's) do not want to hand out free credit reports if they don't have to.

Is it possible that the co-applicant could be so strong that you would approve the deal no matter how bad the applicant's credit report? If that is possible, then one could argue that the decision not to do so was based in part on the credit of the co-applicant.

------------------
Al Miller, CRCM
Fremont Bank (CA)
(510) 790-5825
(510) 505-5211 FAX

Opinions expressed are my own and not necessarily shared by my employer.

Al,
That might be possible at some institutions, but we decline the loan if the applicant does not qualify regardless of the strength of the co-applicant. In fact, I am told that if the loan does not "kick out' for review, and the applicant's credit is either really bad or really good, the system will not even score the co-applicant!

I've always viewed misstatements to either the applicant or coapplicant as violations--if it's not true, you shouldn't include it in a disclosure.

David used the term "over disclosure", but I wouldn't let my lenders think of it in that way. I'd call it overdisclosure if I give 8 valid reasons when the Fed declares more than 4 to be unnecessary. All 8 are true, but information overload is confusing.

Both the Reg B and FCRA disclosures are intended to be educational. If coapplicants are told incorrectly that their credit adversely affected your lending decisions and they procede to try to clean up their act, neither the lender nor the CB can suggest that the coapplicant should do anything that would matter.

On a joint application if only one applicant qualifies for the credit, I suggest the lender send a counteroffer to the credit worthy individual telling them we would make the loan in their name only and a denial to the one who doesn't qualify. The counter-offer would reflect the fact that the co-applicant does not meet our credit standards. If neither individual qualifies on their own, we send separate denials to each applicant listing their specific reasons for the turndown.

This thread leaves me wondering how many angels actually do dance on the head of a pin! This debate -- worthy as it is -- should be resolved by the bank regulatory agencies. The FTC is never going to do it. The Fed solved this problem under Regulation B by clearly providing that the lender could send one adverse action notice and did not have to notify all parties. I think it is time to suggest to the Fed that they use their new rulemaking authority under FCRA to do the same thing with these notices.

This question is truly the common cold of the regulatory compliance business! I started getting it (the question, that is) in 1981. Every few years a different business unit would raise it again. The interpretation that answers this question should bear the name of the person who provides the cure--sort of like the Pasteur treatment.

Thank you all for your input, suggestions, humor, ect.! I am going to write up my recommendations and place the whole matter firmly in the capable hands of our senior counsel!
Leslie

Would you need to check the FCRA section for "other third party" source if the value of collateral was the reason for denial and it was determined to be insufficient by an investor (mortgage app.)?

No, the value of the collateral has no bearing on the credit worthiness of the applicant.

FCRA only applies to information about the consumer. It can come from a credit bureau or a third party source. But information about the collateral, or even the business itself, would not be information about the consumer's applying.