Get the Whole Story
Posted by Anthony Demangone
Last Friday, I started a string of posts to give you some ideas on how you can make 2011 a better "compliance year." Â With that in mind, let's talk about "getting the whole story." Â
You may be researching an issue, such as adverse action notices under Regulation B. Â It can be tempting to try to focus in on a particular part of the regulation to find an answer, but sometimes you need to "get the whole story" to understand an issue in its entirety. Â Let's take the issue of "adverse action" under regulation B. Â To get the whole story, start looking through the regulation to see where the term "adverse action" is discussed. Â At this point, you aren't researching - you are gathering. So, you'd gather the definition of "adverse action", and the Official Staff Interpretations to the definition. You'd gather the notification requirements section, and any corresponding parts of the Official Staff Interpretation. Once you have the entire universe of materials, pour over it.
I can't tell you how useful this can be. Â As an example, I've included the complete definition and the corresponding Official Staff Interpretation for "adverse action" at the end of this post.. If you read through this, you probably have enough information to answer 85% of the "adverse action" questions we get. Â I'll let you decide whether you read on, but I'm telling you - there's no substitute for rolling up your sleeves and slogging through a regulation to understand it.
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The Regulatory Definition (Regulation B)
c) Adverse action. (1) The term means:
(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.
(2) The term does not include:
(i) A change in the terms of an account expressly agreed to by an applicant.
(ii) Any action or forbearance relating to an account taken in connection with inactivity, default, or delinquency as to that account;
(iii) A refusal or failure to authorize an account transaction at point of sale or loan, except when the refusal is a termination 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 when the refusal is a denial of an application for an increase in the amount of credit available under the account;
(iv) A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested; or
(v) A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested.
(3) An action that falls within the definition of both paragraphs (c)(1) and (c)(2) of this section is governed by paragraph (c)(2) of this section.
The Official Staff Interpretation to this Definition
2(c)Â Adverse action.
Paragraph 2(c)(1)(i)
1. Application for credit. If the applicant applied in accordance with the creditor's procedures, a refusal to refinance or extend the term of a business or other loan is adverse action.
Paragraph 2(c)(1)(ii)
1. Move from service area. If a credit card issuer terminates the open-end account of a customer because the customer has moved out of the card issuer's service area, the termination is adverse action unless termination on this ground was explicitly provided for in the credit agreement between the parties. In cases where termination is adverse action, notification is required under ç202.9.
2. Termination based on credit limit. If a creditor terminates credit accounts that have low credit limits (for example, under $400) but keeps open accounts with higher credit limits, the termination is adverse action and notification is required under ç202.9.
Paragraph 2(c)(2)(ii)
1. DefaultâÂÂexercise of due-on-sale clause. If a mortgagor sells or transfers mortgaged property without the consent of the mortgagee, and the mortgagee exercises its contractual right to accelerate the mortgage loan, the mortgagee may treat the mortgagor as being in default. An adverse action notice need not be given to the mortgagor or the transferee. (See comment 2(e)âÂÂ1 for treatment of a purchaser who requests to assume the loan.)
2. Current delinquency or default. The term adverse action does not include a creditor's termination of an account when the accountholder is currently in default or delinquent on that account. Notification in accordance with ç202.9 of the regulation generally is required, however, if the creditor's action is based on a past delinquency or default on the account.
Paragraph 2(c)(2)(iii)
1. Point-of-sale transactions. Denial of credit at point of sale is not adverse action except under those circumstances specified in the regulation. For example, denial at point of sale is not adverse action in the following situations:
i. A credit cardholder presents an expired card or a card that has been reported to the card issuer as lost or stolen.
ii. The amount of a transaction exceeds a cash advance or credit limit.
iii. The circumstances (such as excessive use of a credit card in a short period of time) suggest that fraud is involved.
iv. The authorization facilities are not functioning.
v. Billing statements have been returned to the creditor for lack of a forwarding address.
2. Application for increase in available credit. A refusal or failure to authorize an account transaction at the point of sale or loan is not adverse action except when the refusal is a denial of an application, submitted in accordance with the creditor's procedures, for an increase in the amount of credit.
Paragraph 2(c)(2)(v)
1. Terms of credit versus type of credit offered. When an applicant applies for credit and the creditor does not offer the credit terms requested by the applicant (for example, the interest rate, length of maturity, collateral, or amount of downpayment), a denial of the application for that reason is adverse action (unless the creditor makes a counteroffer that is accepted by the applicant) and the applicant is entitled to notification under ç202.9.