Photo Credit: Stuart Miles

By: Brian Sebak, Auditor at P&G Associates

An adverse action notice is given to any potential borrower who applies for credit and is denied. This notice is required to be sent out to the customer within 30 days of the application date, and must include the name, address, and telephone number of the person for further explanation of the specific reasons for denial. As of July 2011 the Federal Reserve Board & Federal Trade Commission published a new rule in regards to content on the adverse action notice. If the credit score of the borrower is in any way a determining factor of the denial/approval of credit, the adverse action notice must include the credit score and related information.
 
Some banks will argue they do not use credit scores in determining a credit decision. During the application review, if a credit report is ran and the score is dramatically low, how can one argue that a 504 credit score will not be considered a determining factor in the decision to deny the loan/credit? Most banks will have more than one format for their adverse action notice, one that includes the credit score information and another notice to remain the same without the credit score information.  Depending on the reasons for denial, the Bank can use either template to use and proceed without violating any regulations or the Dodd-Frank Act. The updates required from the Dodd-Frank Act include all adverse action notices to contain:

• The numerical score used in taking the adverse action
• The range of  possible credit scores and model that was used
• Explanation of factors that adversely affected the consumer's credit score
• The date the credit report was generated
• A prescribed statement explaining the credit scores

These additions to your bank’s adverse action notice will not only ensure to be in compliance with the regulation and Dodd-Frank Act, but also disclose to the borrower the specific reasons for denial. Giving the consumer the key factors for denial and a specific reason are necessary because some applicants may be denied based solely on employment, income, or even residency. "The Dodd-Frank Act has made fundamental changes to certain aspects of the ways in which financial institutions and businesses can use credit scores, and has increased the amount and type of information which must be obtained from credit reporting agencies, potentially increasing direct and indirect costs.”

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