Don't Overlook The Common Violations

According to the OCC, the most common violation of Regulation B that examiners identify is 12 CFR 202.9(a)(2), the content of the adverse action notice. This isn't exactly a new violation. Problems with adverse action notices go back to the beginning of Regulation B.

One common error with the adverse action notice is that it does not contain all of the required information. Remember the list contained in the regulation and be sure that all required elements are included in the notice: a statement of the action taken, the name and address of the creditor, a statement of the customer's ECOA rights, the name of the financial institution's regulator, and a statement of the reasons or an explanation of the applicant's right to a statement of the reasons. If one of these elements is omitted, the notice is incomplete.

The notification should contain a clear statement of what the action was: approval, counteroffer, or denial. Sometimes this seems so obvious that it is overlooked.

The notice should also contain the ECOA statement of the customer's rights. This is simply a brief summary of the anti-discrimination provisions of ECOA. This, too, is so routine that it is easily omitted. Many creditors print this notice as a part of the adverse action stationary - a perfectly acceptable method of compliance. However, staff should be sure to use the special stationary for adverse action notices. Ordinary stationary won't contain the required statement.

Finally, a common finding is that the reasons identified for the customer are incorrect or inadequate reasons. The regulation requires that the creditor give the applicant all of the "principle and specific" reasons that adverse action was taken. This means that if the application was denied for three reasons, giving only one or two reasons to the customer is insufficient. The Commentary to Regulation B does permit the creditor to draw the line at four reasons. So if there are five or more reasons for denial, you only have to provide four of them.

In addition to the number of reasons given to the applicant, the reasons should be accurate. In reviewing the reasons you provide, consider the purpose of the adverse action notice. The goal is to enable the customer to identify errors, identify possible discrimination, and - perhaps most important from the creditors perspective - learn from the experience. Providing misleading answers makes for uneducated customers.

FDIC notes slightly different errors as the most common violations, however the adverse action problems identified by the OCC are also on the FDIC's common violation list. FDIC examiners' most common finding is that institutions collect information that is prohibited by 202.5(d)(3) and (5). This monitoring data, although required for certain mortgage loans, is prohibited in every other kind of credit transaction.

Generally, monitoring information violations occur for two reasons. First, the loan officer taking the application is confused about when to collect and when not to collect monitoring data. Second, customers use mortgage application forms for installment loans or other loans not subject to monitoring data collection. And they complete the form, thus putting the bank into non-compliance with the data collection prohibition.

These common violations represent the technical requirements that may have been overlooked in recent years because of the emphasis on measuring substantive discrimination. The message you should get from these findings is that all of your training efforts should include attention to these details. Violations such as these don't carry the serious consequences of substantive discrimination. However, you don't want them found a second time.

None of these common violations compare in severity to a single act of substantive discrimination. Substance should be a the top of your priorities - but paying attention to forms may help you find or evaluate substance.

Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 5, No. 4, 5/00