The Equal Credit Opportunity Act (ECOA), implemented by the Regulation B as documented in 12 CFR Part 1002, underscores the congressional determination that consumers and businesses should receive a notice of the reasons why the lender has rejected borrower’s application for an extension of credit following an adverse action. An adverse action is defined in Regulation B as: (1) 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 other terms), and the applicant uses or expressly accepts the credit offered; (2) A termination of an account or an unfavorable change in terms of an account that does not affect all or substantially all of a class of the creditor’s accounts; or (3) A refusal to increase the amount of credit available to an applicant who has made an application for an increase. Moreover, to provide additional clarity about the definition, Regulation B also specifically delineates what is not adverse action: (1) A change in the terms of an account expressly agreed to by an applicant; (2) Any action or forbearance relating to an account taken in connection with inactivity, default or delinquency as to that account; (3) 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 credit’s accounts or when the refusal is a denial of an application for an increase in the amount of credit available under the account; (4) A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested; or (5) A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested. In line with this definition, many conventional and participating SBA lenders often need additional guidance with respect to (1) whether the Regulation B requirements apply to their institution; (2) when is Regulation B notice required; (3) who must receive the Regulation B notice; and (4) what are the content requirements for the Regulation B notice.
Although the statute provides a limited list of exceptions for certain classes of transactions, the scope of Regulation B applies to all “Creditors” other than those excluded from coverage via Section 1029 of the Consumer Financial Protection Act of 2010. Section 1002.2(l) of Regulation B defines a Creditor as a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit. The term Creditor includes creditor’s assignee, transferee, or subrogee. Moreover, the term Creditor also includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made. Additionally, based on the Supplement I index to Regulation B, the official staff interpretation of “Assignee” includes all persons participating in the credit decision. This may include an assignee or a potential purchaser of the obligation who influences the credit decision by indicating whether it will purchase the obligation if the transaction is consummated.
Section 1002.9(a)(1) of Regulation B identifies when a notice of adverse action must be provided. More specifically, a creditor must provide said notice if it has: (1) taken adverse action on a completed credit application; (2) taken adverse action on an incomplete credit application; (3) taken adverse action on an existing credit account; or (4) made a counteroffer to an application for credit and the applicant does not accept the counteroffer. Moreover, the time parameters for when a creditor must provide the Regulation B notice are as follows: (1) thirty (30) days after receiving a completed application concerning the creditor’s approval of, counteroffer to, or adverse action on the application; (2) thirty (30) days after taking adverse action on an incomplete application, unless notice is provided in accordance with requirements for incomplete application under Section 1002.9(c); (3) thirty (30) days after taking adverse action on an existing account; or (4) ninety (90) days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered. Conversely, a Regulation B notice is not required if: (1) the transaction does not involve credit; (2) a credit applicant accepts a counteroffer; (3) a credit applicant expressly withdraws an application; or (4) the creditor approves a credit application and both parties expect that the applicant will inquire about its status, but if the applicant does not inquire within 30 days after application (the approved application is treated as withdrawn).
With respect to specific recipients of the Regulation B notice, the statute dictates that said notice must be received by any applicant, including individuals applying for credit, businesses of all sizes, and any person liable (or who will become liable) for the debt such as a co-borrower. It is important to note that under the Regulation B’s definition of the “applicant,” the guarantors are not considered to be applicants; as such, there is no requirement under Regulation B to provide an adverse action notice to any guarantor.
Regulation B includes specific content and format requirements for adverse action notices. Although not mandatory to use, Appendix C of Regulation B provides a model notice form that satisfies the adverse action disclosure requirements. Lenders, however, are free to use their own form so long as the following items are disclosed: (1) creditor’s name and address; (2) an ECOA antidiscrimination verbiage substantially similar in format as listed in 12 CFR 1002.9(b)(1); (3) name and address of the creditor’s primary regulator; (4) a statement of action taken by the creditor; and (5) either a statement of the specific reasons for the action taken or a disclosure of the applicant’s right to a statement of specific reason and the name, address, and telephone number of the person or office from which information can be obtained.
For further assistance please contact the attorneys at Starfield & Smith, P.C. at 215-542-7070 or email us at info@starfieldsmith.com.
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