Adverse Action: A Couple of Frequently Asked Questions

The Compliance Team here at America's Credit Unions often fields questions related to adverse action notices. We have recently written a couple blogs on the topic, which you can find here and here, and I thought it may be helpful to add a third companion blog (to complete the "trilogy", if you will) regarding the two questions that we regularly come across in the compliance inbox.

FAQ 1: Do we need to send an adverse action notice when we close a share account?

Extension of Credit

First, let's start with a refresher. Section 1002.2(c)(1) of Regulation B defines "adverse action" as:

"(i) A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered;

(ii) A termination of an account or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor's accounts; or

(iii) A refusal to increase the amount of credit available to an applicant who has made an application for an increase." (Emphasis added).

Further, section 1002.2(a) defines an "account" as "an extension of credit". As such, Regulation B does not cover share accounts unless they have a credit feature. So, if the share account does not have a credit feature (such as an overdraft line of credit), the adverse action requirements under Regulation B would not apply. Credit unions should note that an overdraft program subject to Regulation E that is not a line of credit would not be considered a credit feature.

Credit Reports

What about under the Fair Credit Reporting Act (FCRA)? As this compliance blog post points out:

"Under section 1681m(a) of the FCRA, adverse action notices are required anytime a credit union takes "adverse action" against any consumer based on information in a "consumer report." Because of this description in the rule, the analysis under the FCRA generally turns on whether a credit report was pulled…" (Emphasis added).

Therefore, determining whether an adverse action notice is required under the FCRA for action taken on a share account will depend on whether the credit union is taking "adverse action" based on any information contained in the member's consumer report. The FCRA defines "consumer report" as:

"(d) Consumer Report.-

(1) In general.-The term "consumer report" means any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer's eligibility for-

(A) credit or insurance to be used primarily for personal, family, or household purposes;

(B) employment purposes; or

(C) any other purpose authorized under section 1681b of this title." (Emphasis added).

However, it's important to note that credit unions may also want to review the account agreement regarding any contractual obligations to send out such notices. Further, as this compliance blog post notes, neither Regulation B nor the FCRA require adverse action notices for cosigners.

FAQ 2: Does Regulation B require that we send an adverse action notice if we're denying a loan for suspicion of fraud?

This is a tricky one and we always advise credit unions to consult with their legal counsel when these types of issues arise, as we are unable to provide legal advice. However, while fraud does not appear to be a reason to not send an adverse action notice pursuant to Regulation B, if the fraud is due to a case of identity theft, sending an adverse action notice to a consumer who did not actually apply for an extension of credit also does not appear consistent with the regulation. However, section 1002.2(c)(2) discusses what is not considered "adverse action", and there is no explicit mention of an exception for fraud.

Another point to think about is what if the credit union is wrong about its suspicion of fraud? In that case, the credit union would be in a position in which it failed to send the adverse action notice as required by the regulation. Ultimately, a credit union may need to decide which approach is best given its own risk tolerance (likely after consulting with its legal counsel). *Note: whether an adverse action notice would be required under the FCRA in such circumstances will also be an issue to discuss with your legal counsel.

That's all for now! As always, the Compliance Team can be reached at compliance@americascreditunions.org with any questions.