Are there situations when "no collateral" would be a legitimate reason given for denial?

Our Bankers System form has "value or type of collateral not sufficient" and we do use it on occasion for no collateral.

Our loan policy states that unsecured loans are granted on a basis of 10% of net worth. So, if an applicant has no net worth to speak of, and no collateral - well - there you go - one such example.

Adam,

One word of caution however is be careful when creating and using your own denial reasons. There is a safe harbor when using the phrases provided in the regulation. Rebekah's is such an example.

MarkB

Well that is not exactly a true statement. In order to fall under the safeharbor rule, you may need to change the reasons listed on the model form or make new ones up. The commentary to Appendix C in Reg B specifically states:

"If the reasons listed on the forms are not the factors actually used, a creditor will not satisfy the notice requirement by simply checking the closest identifiable factor listed. "

So you really need to make sure that the reason you are giving for denial specifically fits the reason for denial based on your underwriting criteria. The Board goes on to give examples of such in the commentary.

One of the biggest Nits I've ever seen Picked between a loan officer and an examiner is the use of the denial reason - "Insufficient Income" when the payment amount for the requested credit was clearly outside of the applicant's ability to pay.

In this case, the applicant wanted something like $75,000 and the payments would have been around $1,200. The applicant's total monthly income was $1,500 leaving no room for normal living expenses.

The examiner argued that the reason "Insufficient Income" was wrong, and the reason should have been "Excessive Debt to Income."

From my point of view, BOTH reasons were not exactly correct. IMHO, the decline reason should have been "What? Are you nuts?????"

I should add, however, that nothing will infuriate an examiner more when they see a request for an UNSECURED LOAN, and the decline reason is "Insufficient Collateral."

The reasoning I have heard is this:
If your bank makes unsecured loans, you better not turn ANYONE down for Insufficient Collateral. Insufficent Net Worth perhaps, but not collateral.

If your bank does NOT make unsecured loans, then your decline reason should be "We don't grant credit on the terms and conditions you requested." Better yet, you should have told the person before they applied that you don't make unsecured loans. HOWEVER, if that's your story, then you better not get caught making unsecured loans to some people. Talk about a Fair Lending issue.....

I agree. At a former employer we were written up for this. The customer wishes to have an unsecured loan. Either the bank will make it or not. If it will, fine. If not, why? If it's just for the lack of collateral and everything else is great then we do a counter-offer and ask for collateral. If not, we deny for the other reasons.

In a very broad sense, there are a very few protected areas that can have nothing to do with a denial. These are in Reg. B and fair housing and we are all familiar with them.

Everything else is defendable as long as you have a reason for your action.

If it isn't discriminatory, you are technically OK. That said, the limits of reason, common sense and morality should kick in and we get where we are today, making sound credit decisions based on the probability of payback.

Logical reasons being stated is a different matter. I don't like to see an unsecured request denied for collateral, but it could be worded such as to say an unsecured request could not be made. I also hate to see excessive obligations or debt to income reasons with no math shown to evidence that it was more than eyeballed. And when you find an equally qualified loan with the math done, approved, then you have problems.

In this case the applicant applied on an unsecured basis and the officer marked "other" and typed no collateral. My thought was since the applicant offered no collateral that the reason given was incorrect. How would you handle if everything else was ok?

I would say they were confirming the request, "no collateral". I would say that was incorrect and "collateral required for a loan under these terms and conditions would be required", would be more appropriate.

I have also been told by examiners not to deny an unsecured loan for value or type of collateral. When I check these denials during my review, I usually find other reasons the applicant was probably really denied for. The loan officer just checks the box and moves on.

I agree that "Value or type of collateral" is an incorrect reason for denying an unsecured loan request. If a bank makes unsecured loans, then there must be a reason why the bank won't make an unsecured loan to this particular applicant. And that reason can't be lack of collateral. Another way to put it is, what is the reason the bank is requiring collateral from this applicant but not from other unsecured loan applicants? That reason is what should be indicated on the denial notice.

I've always asked the lenders how they can deny an application for insufficient collateral when none was offered and they didn't counter for any?

As mentioned earlier in the thread, using this denial reason for an unsecured loan request will attract the attention of an examiner very quickly.

I found out the reason that "no collateral" was given as the reason. There is a cutoff score below which centralized underwriting will not approve unsecured loans. However, the lending officer could override and document why he is approving the loan. In cases where the applicant applies on an unsecured basis and his score is below the cutoff, but still has fairly good credit... would the reason such as collateral required for a loan under these terms be acceptable from "central underwriting"?? If the lender does not override, then, he could use this reason on the denial.

I opine no - sounds like his request for "credit as requested" was denied due to his low credit score - therefor the reasons cited would have to relate to the primary reasons impacting his credit score. The bank could counter with an offer to lend with collateral - but that has nothing to do with the original request.

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would the reason such as collateral required for a loan under these terms be acceptable from "central underwriting"??

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Not IMO, the loan is being denied becasue of credit score, not the terms of the loan.

Could "low credit score" be used if it is applying just to his credit? I was thinking that it had to be empirically derived, etc. In this case it is based on EMPIRICA score.

Here's a quote from the FDIC Violation codes:
§202.9(b)(2) requires a creditor to disclose the principal reasons for denying an application or taking other adverse action. The regulation does not mandate that a specific number of reasons be disclosed, but disclosure of more than four reasons is not likely to be helpful to the applicant.

This section also states: The statement of reasons for adverse action required by paragraph (a)(2)(i) of this section must be specific and indicate the principal reason(s) for the adverse action. Statements that the adverse action was based on the creditor’s internal standards or policies or that the applicant failed to achieve the qualifying score on the creditor’s credit scoring system are insufficient.

Suppose central underwriting is to deny any loan with a score of below 675. The EMPIRICA score may come back as 650 and show too many accounts with balances; time since delinquency is too recent or unknown; number of revolving accounts with balances higher than limits. Should I check other and use those reasons even though there's nothing in bank policy specifiying how many accounts is too many or how recent a delinquency needs to be?

Our FDIC examiners have been noting as an exception if we use "value or type of collateral not sufficient" as reason for denial if request is for unsecured credit. This has probably been going on for4 years or so.

Are you now noting such reasons as stated in my earlier post?

Adam:

Your bank's policy is to deny someone with a credit score =< XXX. The reasons stated are the basis for the credit score, so in a "round-a-bout" way it is your bank's policy.