Any of you use credit score to freeze lines under 226.5b(f)(3)(vi)(B)? Do you think a big enough change in a score is enough or do you need a fact specific change like you know someone's income has declined? Thanks.

Steve, we do not use the credit score for this, but we do not routinely update credit reports on our HELOCs. If this is a means that you use to evaluate your portfolio, or if you pulled a credit report on this one account due to problems, I see no problem in freezing the account as long as you have a legitimate reason to believe the credit score will adversely affect this person’s ability to repay his obligation.

On a side note, I would be careful in freezing the line based on the credit score only, unless you freeze all lines based on a credit score less than XXX.

I am dealing with a similar issue. I too advise caution if you freeze based on credit score only. If you did, you need to follow that for all lines, and you should have an empiracally sound and tested model to base the score evalutation and freeze.

Also, remember if you freeze the line based solely on score reduction, you must have a mechanism in place to monitor the score and reinstate if the score increases.

And don't forget to give an adverse action notice.

I don't believe it is an "Adverse Action" notice that is required (under Reg B), but rather a "Change in Terms" notice is required (under Reg Z) within three days after the action is taken, see 226.9(c)(3). Also, don't forget that you can freeze a home equity line ONLY for one of the reasons listed in the regulation, and if the reason here for freezing the account is that the "creditor reasonably believes the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the financial circumstances of the consumer", this is a two prong test, i.e. two conditions must be met: 1. the change must be "material"; and 2) as a result of the change, the creditor must have a reasonable belief that the consumer will be unable to fulfill the payment obligations. See the commentary to 5b(f)(vi), no. 7. Unless the change in terms notice requires the consumer to request reinstatement of credit privileges, the creditor must monitor the credit on an ongoing basis and restore privileges as soon as possible after the condition that permitted the action ceases to exist.

Anonymous - you are absolutely right.

what if you have a loan product with a draw period followed by repayment period? At end of draw, you offer borrower the opportunity to extend the draw period, contingent upon credit quality. After credit evaluation, you decide you do not want to extend the draw period.

I say that would require an adverse action notice. Opinions? Comments?

I guess I have to disagree with Anonymous and SJB. Unless the account is past due at the time of the freeze, I believe it is an adverse action under Reg B and it would always be considered adverse action under FCRA regardless of the account status if you are basing the freeze on a credit score. Without any other factors, I also think that it is risky to freeze Home Equity Lines based solely on a low credit score. If you think not, please provide a basis.

Randy- I agree with you. Included in the definition of AA is " A termination of an account or an unfavorable change in the terms of an account that does not affect all or a substantial portion of a class of the creditor's accounts." Performance-based customer management techniques do not affect a substantial portion of the bank's accounts--just the ones that have fallen out of grace with the portfolio manager. A sag in the customer's credit score results from the customer's behavior and AA notices inform the customer of the nature and source of the defects so that the customer can work on them and regain preferred status.

The term Adverse Action excludes: "any action or forbearance relating to an account taken in connection with inactivity, default, or delinquency as to that account." See 202.2(c)(2)(ii).

Anonymous - I'm not sure what point you are trying to make????

So.........what goes into the score that drives your decision?

If it's nothing but " inactivity, default, or delinquency as to that account", then you're all set. Real world: scores are affected by lots of factors OTHER than the account in question.

The point is that if you are taking action due to a default on the line, then Reg B excludes this from the definition of Adverse Action (see 202.2(c)(2)(ii)) and as a consequence, since it is not an "Adverse Action" under the regulation, no Notice of Adverse Action is required. Only the Change in Terms notice is required under Reg Z, 226.9(c)(3).

Plus they have to be in current default or currently delinquent - if you are acting on past defaults or delinquencies - it is adverse action under Reg B.

The fact that their credit score has reached a certain threshold or overall credit capacity has diminished would not in itself be considered a default on the loan. Additionally, if the freeze involves the use of a credit report, the definition in FCRA is broader than Reg B and a FCRA adverse action would be required regardless whether they are delinquent or in default.

I am not advocating that a decline in the credit score is sufficient reason to freeze a HELOC. As stated in my first response, the creditor cannot simply freeze a HELOC because they want to. Rather, the creditor must have one of the specific reasons listed in the regulation before prohibiting further extensions, which reasons should also be listed in your agreement as a reason for which the creditor would suspend advances. The only one that I could see that would possibly be applicable where the credit score had significantly declined would be 226.5b(f)(3)(vi)(b): "the creditor reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer's financial circumstances." As the commentary points out, in order to be able to suspend credit advances under this provision in the regulation, there must first be a "material" change and second the creditor must have a reasonable belief that the consumer will not be able to fulfill the repayment obligations. Just because the credit score goes down, it not sufficient reason on its own. With respect to the FCRA adverse action notice, all I can tell you is that as in-house counsel for a large national bank, I prepared a draft form of "change in terms" notice under 226.9(c)(3) that our bankers would use to notify HELOC customers that their privileges to make advances on the line was being suspended because of the reason listed (again, must be one of the reasons permitted under the regulation, no others). This form was sent to outside counsel for review, which I believe to be one of the premier regulatory law firms in the country. The draft form that I prepared that was sent to this counsel for review contained the FCRA notice. We were specifically told by that firm that the FCRA notice was not required under this circumstance.

.... but if the lines are being frozen, discontinued, etc. based on a credit score; in order to get a credit score you have to obtain a credit report, and if you are making a decision based on information in the credit report IMO that triggers the FCRA notice.

If you obtain your information that gives you reason to believe he cannot continue to service the debt properly through your conversation with the borrower or by updating an application, or if he is currently delinquent then I would agree the FCRA notice is not required. But, I still contend that if information in a credit report is used to make or influence your decision, then the FCRA notice is triggered.

Now, if you use an internal risk scoring system to evaluate your portfolio, where a credit report is not used, then I don't think the FCRA notice is required.

I fully agree with Dan concerning FCRA requirements. And I guess I also feel compelled to reiterate that your change of terms notice would also have to comply with the adverse action notification requirements of Reg B, if the customer was not currently in default or delinquent.

I know that I am reviving a very old post but I have a question. Do we have to provide any adverse action notices under either Reg B or Reg Z (Change in Terms notice) on a borrower who is delinquent? I thought that if we were freezing a loan for any reason that we had to provide an adverse action notice to the borrower in writing but I cannot find it. Thanks for your help

According to Reg B Section 202.9, adverse action does not include "any action (or inaction) taken because of inactivity, or a current delinquency or default on the account". Based on the definition, you do not need to provide an adverse action notice to the borrower.