Is anyone aware of where I might locate an explanation of the adverse action reasons given by Reg B in the model disclosure? For example, does poor credit performance with us include charged off deposit accounts? What does income insufficient for amount of credit requested mean?

I have never seen specific definitions. I do recall reading that you can use the template reasons for denial and do not need to add specificity.

As an example, turning someone down for length of employment could mean they have been on the job only a week, or that their contract runs out in one week and they have no income after that.

I could see "credit performance" as being related to a DDA. If you are not comfortable with the templated reasons, use "Other" and specify "charged off checking account"

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

Income insufficient -- someone that makes $1,200 a month probably can't afford a $35,000 car.

All joking aside, your bank may use debt-to- income ratios to determine if an applicant can afford his/her exisiting debt along with the proposed payment.

When an applicant's income cannot cover the proposed debt and leave the applicant with sufficient discretionary income to live on - the applicant's income may be insufficient.

Perhaps your loan policy provides some information.

Dolly Nugent
Vice President
Compliance & CRA Officer

Here is my 2 cents and a word of caution from someone who has been there:

It is wise that your loan policy reflects the same definitions as your adverse action reasons. For example, if you use length of employment as a reason for turndown, it might be wise to include an unacceptable or acceptable time for length of employment.

Also, if you use debt to income as a reason for denial, be sure that you have some type of work sheet to prove it to examiners.

Recently, we received a complaint....a customer was denied a loan based on debt to income. The customer was clearly a poor risk, however, we had no work sheet proving the method used by the loan officer to calculated the debt to income.

When I received the complaint, I asked for the loan file and began to calculate the debt to income. I found it to be in accordance with our policy. The loan officer was new to our bank and was not able to arrive at the same debt to income figure listed in his loan documentation. Additionally, he had not read all of the income records or read them wrong...................Anyway...........

This proved to be very sticky...needless to say....

Good luck

Andy, when you say, I could see "credit performance" as being related to a DDA. Do you mean if it is tied to something such as a credit line? Thanks for the clarification.

In a broad definition for this use you could say we lost money on your DDA and that is your "credit performance" here. After all, are overdrafts not a credit, whether or not it is a line of credit. I don't believe you have to read Reg. Z or other definitions into these. What is a reasonable interpretation of these reasons between the bank and the consumer, what does the consumer think. Most often we tell the consumer orally what our decision is and why. The AAN is a follow-up so they have a complete understanding. We will have tried to salvage the deal in some way before we get to this point.

I believe a big part of the use of the AAN template reasons is consistency. Your bank needs to use them consistently. That doesn't mean that a reason has only one use. As I noted prior, "length of employment" may mean to little time on the job or that the job is coming to an end.

This is not uncommon with our military customers. When someone has been in the service for 3 years and is to be discharged in 6 months, do you want to finance a 36 month car note?

Kathy noted that you should have adequate documentation to back up the reasoning. I totally agree. If the app has some notes attached to it or penned on it indicating (as an example) the date of discharge, we know exactly what we meant because that is a standard item for us.

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Andy Zavoina
Opinions stated are not necessarily that of my employer.

My two cents for what it's worth - I had an examiner tell me that you cannot use insufficient income unless you have a miniumum income policy.

I tend to disagree with that to a small degree: I use Insufficient Income if the applicant's total income is insufficient to service the requested debt (not including any other existing debt.) Thus I would modify Dolly's example of $1,200 as being insufficent for a $75,000 car.

If the problem is that EXISTING debt would prevent the person from also being able to meet our debt to income guidelines, then I use the decline reason Excessive Obligations in Relation to Income.

Kathy makes an important point - if you are going to use debt to income as a decline reason, then you better have defined in your loan policy either what is acceptable DTI or unacceptable DTI.

[This message has been edited by Bonnie M (edited 08-02-2001).]

Here I go being the historian again, but then, I was around when those model forms were put in the reg!

There is no magic to the reasons listed in the model forms. They were simply put in because they were typical reasons for denial of a credit application. They are not designed to give a precise explanation of the creditor's reasoning and an examiner should not expect them to. Generally, when an examiner disputes the meaning of a reason given, they are bothered by something that underlies the underwriting. Then there are those who just pick at things.

The reasons are designed to be broad -- clear enough to tell the consumer where the problem is but not so detailed that you provide the applicant with a recipe to get past your underwriters the next time.

That being said, Kathy's point is more important than ever: whatever reason you use should be supported in your lending policy AND in the loan application file. Fair lending analysis now relies on your documentation. Missing documentation is a presumption of a problem. The minimal documentation should at least support your reasons for denial.

In our bank, loan policy's guidelines state that the bank does not extend credit on an unsecured debit consolidation/personal expense loan. First, is the lender required to take an application? Second, if the lender does take the application and applies loan policy, is this adverse action? If not, what does the lender do with the application (it is written)? If it is AA, how would you state this on an adverse action notice? My understanding is that you shouldn't just say "does not meet loan policy guidelines." I am trying to work on some training for our lenders and these are some of their questions. Thank you for your thoughts as always!

Angela,
You could try this old chestnut:
"We do not grant credit under the terms you have requested."

The caveat with that AA reason is you had better make sure you DON'T grant ANYONE that kind of credit!