When a financial institution denies an application, Regulation B sets forth several requirements that must be met. Among other things, financial institutions are required to notify an applicant of the denial and (as applicable) provide the applicant with a “statement of specific reasons” for denial. One of the biggest challenges in providing the specific reasons for denial is determining which adverse action reasons should be listed on the denial notice. As Regulation B does not explain what reasons should be used, financial institutions benefit from creating an Adverse Action Reasons Chart.
Benefits of an Adverse Action Reasons Chart
An adverse action reasons chart is simply a standardized procedures where a financial institution ensures that it consistently uses adverse action reasons from one applicant to the next. Without a method to be consistent, applicants may receive denial reasons on an inconsistent basis, which could result in elevated fair lending risk for the organization.
Creating an Adverse Action Reasons Chart
To create an adverse action reasons chart, a financial institution should first look at the reasons for denial options found on its adverse action model form and then provide guidance as to when each reason should be used. As Regulation B does not provide standard denial reasons, most creditors (through their forms vendors and loan operating systems) will utilize slightly different reasons for denial on their adverse action forms. Therefore, each financial institution must establish standards for the reasons for denial it plans to utilize. In other words, a financial institution may need to start by reviewing what adverse action reasons are actually available through their system and then establish criteria as to when each reason should be utilized.
Sample Adverse Action Reasons Chart
Though each financial institution may have a slightly different list of denial reasons to choose from, most adverse action notice templates utilize the adverse action reasons found in Model Form C-1 from Appendix C of Regulation B.
The following example of an Adverse Action Reasons Chart lists the reasons found on Form C-1 in Appendix C of Regulation B and could be utilized by a financial institution to ensure that reasons for denial are applied consistently across the entire organization. While this sample Adverse Action Reasons Chart may be acceptable for some financial institutions, each financial institution should review and revise this chart to meet the specific needs of the organization.
Adverse Action Reasons Chart
When providing adverse action reasons, include all principal reasons for denying the applicant (no minimum number of reasons but up to a maximum of four). Use the following as applicable:
Credit application incomplete. This reason should be used when a creditor denies an application due to incompleteness. This reason should not be used if a creditor provides a notice of incomplete application in accordance with Regulation B (as this would not be a denial requiring an adverse action notice).
Insufficient number of credit references provided. This reason should be used when a creditor has requested credit references beyond the history found in a credit report (such as when the applicant does not have an established credit file or credit score), and the applicant was not able to supply sufficient credit references according to the financial institutions defined standards (such as a minimum number of credit references).
Unacceptable type of credit references provided. This reason should be used when a creditor has requested credit references beyond the history found in a credit report (such as when the applicant does not have an established credit file or credit score), and the applicant provided credit references that were not acceptable according to the financial institutions defined standards.
Unable to verify credit references. This reason should be used when a creditor has requested credit references beyond the history found in a credit report (such as when the applicant does not have an established credit file or credit score), and the creditor is unable to very the references provided by the applicant. The denied file should document the creditors attempts to verify credit references.
Temporary or irregular employment. This reason should be used only if the financial institution has a defined policy regarding acceptable temporary or irregular employment, and the borrower’s employment history does not meet the definition of acceptable temporary or irregular employment.
Unable to verify employment. This reason should be used when a creditor regularly verifies employment and is unable to verify the employment of an applicant after a verification attempt was made. The denied file should document the creditors attempts to verify employment.
Length of employment. This reason should only be used when a creditor has a defined minimum length of employment and the applicant’s length of employment does not meet the minimum length. The denied file should document the applicant’s length of employment and the bank’s established minimum length of employment.
Income insufficient for amount of credit requested. This reason should be used when an applicant’s proposed debt-to-income ratio exceeds the financial institution’s maximum DTI ratio after the proposed payment is added into the DTI calculation. A corresponding DTI should be retained in the denied file.
Excessive obligations in relation to income. This reason should be used when an applicant’s current debt-to-income ratio exceeds the financial institution’s maximum DTI ratio before the proposed payment is added into the DTI calculation. A corresponding DTI should be retained in the denied file.
Unable to verify income. This adverse action reason should only be used when a financial institution makes an attempt to verify the income of the applicant but is unable to do so. The denied file should document the attempts that were made to verify income.
Length of residence. This reason should be used when the applicant’s length of residence does not comply with the financial institution’s established minimum length of residence. (Note: this reason should only be used if a bank has a consistently applied minimum length of residence and the borrower does not meet the minimum requirements.)
Temporary residence. This reason should be used when a creditor knows that the current residence of the applicant is not a permanent residence.
Unable to verify residence. This reason should be used when a creditor has attempted, but is unable to verify the residence of the applicant. The denied file should document the creditors attempts to verify residency.
No credit file. This reason should be used when a creditor requests a credit report on an applicant, but the applicant does not have (or the creditor is unable to locate) an established credit file.
Limited credit experience. This reason should be used when an applicant has a credit history/credit report but lacks a sufficient number of tradelines to satisfy the bank’s standards. This reason can be used when reviewing either a credit report or credit references provided by the applicant.
Poor credit performance with us. This reason should be used when the applicant has a history of poor credit performance with our financial institution. The denied file should provide evidence of late payments with us and other evidence of poor credit performance with us (such as charge offs).
Delinquent past or present credit obligations with others. This reason should be used when the credit report reflects late payments to creditors other than our financial institution and those delinquencies do not satisfy our credit standards.
Collection action or judgment. This reason should be used only when the credit report indicates a collection action or judgment that does not satisfy our credit standards.
Garnishment or attachment. This reason should only be used when the credit report indicates a garnishment or attachment that does not satisfy our credit standards.
Foreclosure or repossession. This reason should only be used when the credit report indicates a foreclosure or repossession that does not satisfy our credit standards.
Bankruptcy. This reason should be used when the credit report reflects a bankruptcy that does not satisfy our credit standards.
Number of recent inquiries on credit bureau report. This reason should only be used when the number of recent credit inquiries exceeds the financial institution’s established maximum number of credit inquiries.
Value or type of collateral not sufficient. This reason should be used when the collateral does not meet underwriting standards, such as when an appraised value comes back lower than expected.
Other, specify: ___. This reason should generally not be utilized but can be used only with the approval of the Sr. Lender or used only when the financial institution has an approved list of “other” reasons and the applicable reason is found on that list.
NOTE: As the above Adverse Action Reasons Chart is just a sample, each financial institution should create a chart that applies to the specific policies and procedures of the organization. The goal of any Adverse Action Reasons Chart should be to create consistency in the use of adverse action reasons. Therefore, reasons used by the financial institution should generally have a corresponding policy that defines acceptable underwriting terms and each adverse action reason should only be used when that reason does not meet the established minimum standards. When underwriting standards are not established, lender discretion may elevate fair lending risk to the creditor.
