Because it is unacceptable to state "low credit score" as a denial reason, we would like to list the key factors from the credit report that adversely affected the applicant's credit score as the reason(s) for denial. The reasons on our AAN are from the model notice in Regulation B. Should we add a few reasons that mirror the common key factors? What is the risk of deviating from the model reasons in the regulation?

The want you to tell the reasons the credit score is not higher. The CRA's list 4 reasons. Absent of something else not related to credit, just transcribe the reasons to the AAN. Risk - IMHO, none at all.

But......the reasons that a score might be low are all covered in Reg B's "model" reasons......delinquent credit, collections, bankruptcy, limited credit experience etc. I can't imagine what else might be the cause. There is also "number of inquiries" which we don't use because nothing in policy states what number is unacceptable to us.

I saw where a bank had a 680 min score and they were having customers that didn't meet the four main that swiggles mentioned as the real reason their score was low was due to high balances on revolving (credit card) debt. In that case, they felt like they had to deviate (use other) and I agreed.

This is exactly what is happening, Adam. The reason the score is below our guidelines is ""high in use balances". Since that reason isn't covered on our model form, I will advise them to use Other.

Thanks for your feedback!

But would this not equate to a DTI that is too high?

It did not. The DTI was fine and there were no lates or any other issues with the credit score. The score seemed to suffer because of how they used their credit cards (i.e. maxing them out) and the lack of non-revolving debt. I really haven't seen this happen too often, but it does for banks who set a relatively high minimum credit score requirement.

Mel. In case you haven't done this already, a good practice for using the "other" field is to only allow the use of pre-approved denial reasons. You could pre-approve a typed in other reason for the purpose we discussed. This will help to reduce your risk, which was your original question.

Basically, the biggest risk comes when lenders feel they can start listing anything they want in the "other" field.

I am curious. Pretend the score was in line, but the customer still had the same profile......maxed out credit cards and lack of non-revolving debt....but everything was paid as agreed.

Would your lender have made the loan?

swiggles - Yes, because this particular product is based only on the credit score.

I expect this to become more of a problem as the number and type of non-traditional scoring models increase.

We currently have a minimum credit score of 700 for our credit card program. We deny the loan on anything under 700. Employees were trained to use a custom denial reason under "other" that was input into the loan operating system. The "other" reason listed in the system is something along the lines of "APPLICANT DOES NOT MEET THE MINIMUM CREDIT SCORE THAT IS REQUIRED FOR THE TYPE OF CREDIT REQUESTED." In some cases, that is the only reason listed.

In a recent audit, it was suggested that we cannot deny based on this reason. Should we start using the factors listed on the credit report since those technically are the reason the score is below our minimum credit score (other than obvious reasons such as delinquencies, DTI, etc)? Does anyone see a problem with the product or minimum score?

Think of an adverse action letter as a guideline what the applicant needs to do to get the loan. Get to your minimum score is a result of actions that need to be taken.

What they need to do is increase their score. What were the greatest detractors from getting a better score - look to the credit bureau. They usually list 4 reasons. Those are the reasons for your denial.

So would you recommend using only the 4 from the bureau or "APPLICANT DOES NOT MEET THE MINIMUM CREDIT SCORE THAT IS REQUIRED FOR THE TYPE OF CREDIT REQUESTED." + the 4 from the bureau? assuming the first due to this:

1002.9(b)(2) – Statement of specific reasons

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, joint applicant, or similar party failed to achieve a qualifying score on the creditor's credit scoring system are insufficient.

It's not a "suggestion" that you list specific reasons. It's a requirement. Look at §1002.9(a)(2)(i). Also, this might help [Federal Register 3/18/03, Vol. 68 No 52 Page 13151]:

The statement of reasons for adverse action must be specific and indicate the principal reason(s) for the adverse action. General 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. Consider the following example:

Joint applicants A and B are denied credit due to applicant B’s poor credit history. A general statement saying, “applicant B did not meet the creditor’s standards of creditworthiness” would be insufficient. A more specific reason such as “applicant B has delinquent past or present credit obligations with others” would be required.

The requirement of providing specific reasons for adverse action is intended to prevent creditors from discriminating based on a co-applicant’s or guarantor’s age, race, sex, or other prohibited basis as well as to educate and inform the consumer as to exactly why credit was denied.

I agree with your auditors, based on this:

"(2) Statement of specific reasons. 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, joint applicant, or similar party failed to achieve a qualifying score on the creditor's credit scoring system are insufficient."


See Rocky P's post above.


No. The main concern for lending standards like this is fair lending, but credit score is not a protected class.

if we are using a combined ECOA-FCRA disclosures, how do we comply with the bolded portions below?

1002.9(b)(2) Statement of specific reasons. 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, joint applicant, or similar party failed to achieve a qualifying score on the creditor's credit scoring system are insufficient.

Commentary to 1002.9(b)(2)
9. Combined ECOA–FCRA disclosures. The ECOA requires disclosure of the principal reasons for denying or taking other adverse action on an application for an extension of credit. The Fair Credit Reporting Act (FCRA) requires a creditor to disclose when it has based its decision in whole or in part on information from a source other than the applicant or its own files. Disclosing that a credit report was obtained and used in the denial of the application, as the FCRA requires, does not satisfy the ECOA requirement to disclose specific reasons. For example, if the applicant's credit history reveals delinquent credit obligations and the application is denied for that reason, to satisfy §1002.9(b)(2) the creditor must disclose that the application was denied because of the applicant's delinquent credit obligations. The FCRA also requires a creditor to disclose, as applicable, a credit score it used in taking adverse action along with related information, including up to four key factors that adversely affected the consumer's credit score (or up to five factors if the number of inquiries made with respect to that consumer report is a key factor). Disclosing the key factors that adversely affected the consumer's credit score does not satisfy the ECOA requirement to disclose specific reasons for denying or taking other adverse action on an application or extension of credit. Sample forms C–1 through C–5 of Appendix C of the regulation provide for both the ECOA and FCRA disclosures. See also comment 9(b)(2)–1.

All that is saying is that "only" disclosing the key factors that impacted the credit score would not comply. You need to also disclose the reasons for the ECOA adverse action. They may be similar or they may not be. For example, if one of the factors that you denied the loan was DTI - that would appear as a ECOA reason, but that has nothing to do with the factors that impacted the credit score disclosed under the FCRA. Conversely, too many credit inquires may have impacted the credit score and would be disclosed under the FCRA reasons, but unless your credit underwriting actually used the number of inquiries as part of the underwriting process, it would not be a reason under the ECOA. Then you might have current or past delinquencies - that very well may appear as a reason for both ECOA and FCRA purposes.

If I'm understanding, what we need to do is use the key factors on the credit report to find a corresponding adverse action reason under ECOA that was also used in the credit underwriting.

If our loan policy states that a credit history of two years is sufficient to make a decision and a key factor for the credit score being under 700 was the length of credit history, could we use "limited credit experience" for our adverse action if the customer has a credit file of over 2 years? I apologize for all the questions, I just want to make sure I'm understanding what everyone is saying and comply with the regulations.

Correct. You need to be specific and explain why the credit score was not sufficient. Your example is perfect.

If I understand correctly, we cannot use the key factors from the credit report when denying due to "did not meet minimum credit score required as per Bank policy". So if one of the key factors is "number of accounts with delinquency", the reason for denial would be "delinquent credit" even though we did not look at the trade lines for delinquent credit and is not in our underwriting policy?

Thanks,

I'm not sure I fully understand your scenario/question, but, yes, you should be listing the things the applicant needs to fix in order to do the loan. For example, the the credit report reflects late payments with others and the corresponding credit score is below your policy, then I would list delinquencies with others.

In this thread, much of the discussion is talking about instances where there are no typical/obvious credit issues on the credit report (i.e. no lates, bankruptcies, etc), but the credit score is still below the bank's standard. When this is the case, your only option may be to look at the key factors for guidance on what negatively affected the credit score.

banker12 - repeating an above post

"Think of an adverse action letter as a guideline what the applicant needs to do to get the loan. Getting to your minimum score is a result of actions that need to be taken.

What they need to do is increase their score. What were the greatest detractors from getting a better score - look to the credit bureau. They usually list 4 reasons. Those are the reasons for your denial.

I think we would need to state in our underwriting policy that reasons for denial will be based on trade line history when the credit score is below the bank requirement, correct? Auditors will look at the policy to see if we denied for the right reasons. Currently, it does not reference what is under the trade line history only on the score.

Thanks,

It wouldn't hurt to define it somewhere, but I wouldn't necessarily think it would need to be in an underwriting policy. As far as underwriting is concerned, you are denying for the credit score - so for fair lending, I don't see an issue if you don't have key factors mentioned anywhere in your underwriting policy. In fact, if you change your underwriting to list specific key factors that could cause a denial, that could potentially create a fair lending problem as even 800+ credit scores have key factors. (That said, it's hard to know the specifics of your process/procedures/policy without seeing them.)

As for the specific reasons for denial, it would provide consistency and be beneficial for auditors/examiners to know why you chose what reasons for denial you chose, but you could outline this procedure in more than one place.