Compliance Blog

Written by Jennifer Aguilar, NAFCU Regulatory Compliance Counsel

One of our FAQs here at NAFCU compliance is whether an adverse action notice is required. There are usually other facts presented that make this question a bit more complicated. Today’s blog looks at the rules under Regulation B for two common scenarios: applicants outside the credit union’s field of membership and applications received from third parties.

Membership

Here’s the scenario: Midtown Federal Credit Union is open to persons who live in Midtown County. Jane lives in Uptown County and applies for a mortgage at Midtown FCU. As Jane is outside the credit union’s field of membership, Midtown denies her application. Does Midtown FCU have to send Jane an adverse action notice?

Under section 1002.9(a)(1), notice is required any time a credit union takes “adverse action” on a credit application. Section 1002.2(c) defines “adverse action” broadly to include denying a loan. However, the rule also provides a number of exceptions, including the following: The “refusal to extend credit because applicable law prohibits the creditor from extending the credit requested” is not adverse action.

As the Federal Credit Union Act prohibits FCUs from lending to nonmembers and since Jane is ineligible for membership, Midtown FCU cannot legally extend credit to Jane. As a result, denying Jane’s loan because she is outside the credit union’s field of membership is arguably not an adverse action so no notice is required. The same analysis can be applied to state-chartered credit unions whose state credit union act prohibits lending to nonmembers.

Third Parties

Here’s the scenario: Blue Sky Credit Union has an indirect lending agreement with Bob’s Cars. John finds a car he likes at Bob’s and applies for financing. Blue Sky CU is among three financial institutions that receives John’s application from Bob’s. After reviewing the application, Blue Sky CU determines not to offer credit to John. Does Blue Sky CU have to send John an adverse action notice?

Section 1002.9(g) provides a special notice rule for applications received through third parties, such as through an indirect lending agreement. Where a third party sends an application to multiple creditors, no notice is required if the applicant accepts or uses one of the offers. If the applicant does not accept any credit, then notice may be sent directly to the applicant or through the third party.

If one of the other institutions offers John credit and he accepts it, then Blue Sky CU does not have to send him an adverse action notice. If John does not accept any credit offered by the three institutions or if all three institutions deny his application, then each one must send an adverse action notice. Bob’s may send the notices to John on behalf of the creditors. As Blue Sky CU may not know whether John accepted another offer, this scenario often requires creditors to rely on the third party to determine whether an adverse action notice is required. This is usually addressed in the indirect lending agreement.

The commentary explains that when notice comes from a third party, the third party may provide a notice for each creditor or may provide a combined notice that identifies each creditor. A creditor is not liable for any violation of the rule made by the third party as long as the creditor provides the third party with the information necessary for the notification and maintains reasonable procedures to avoid violations.

In each of the two scenario’s above, while an adverse action notice may not be required under Regulation B, one may still be required under the FCRA. If a consumer report was used as part of the decision to deny the application, the credit union will want to ensure it also reviews the adverse action notice rules under the FCRA. This article from the Minneapolis Federal Reserve provides a good overview of the rules under both Regulation B and the FCRA:  Adverse Action Notice Requirements Under the ECOA and the FCRA.