FCRA, ECOA, and Adverse Action Notices

The interpretations of the Fair Credit Reporting Act issued by the Federal Trade Commission have raised the confusion level about adverse action notices to an all time high. For every bank compliance program, there are both procedural and training issues to be resolved.

Confusion and choices
How does this interpretation really work? The FCRA requires the creditor to give an adverse action notice to each consumer whose report was used to deny the application. There are two critical elements to this. First, the consumer's credit report was acquired ("pulled") and second, information in that consumer's credit report was used to make the adverse decision.

The difference in these two triggers is where much of the confusion begins. Then the confusion gets worse when we look at the ECOA and Regulation B requirements. Since adverse action notices are among the most common violations of both Regulation B and FCRA, some attention to this area can do a great deal to reduce violations.

Notice content
First, let's look at the difference between ECOA and FCRA notices. ECOA and Regulation B have specific requirements for adverse action notices. The required elements, listed in 12 CFR 202.9 include that the notice provide the creditor's name and address, a statement of the action taken, a list of the principle and specific reasons for the adverse action, and the ECOA notice.

FCRA has different requirements. The required elements, listed in 615(a)of the act, include a statement that the credit report was used in taking adverse action, the name, address and telephone number of the credit reporting company, a statement that the consumer has a right to a copy of their credit report and to dispute the accuracy of information in the report, and a statement that the credit bureau did not participate in and cannot explain the credit decision.

The content of these two notices have very little overlap. However, the notices have been provided under similar circumstances - the denial of a credit application. For convenience, these two notices have been combined in Regulation B's model forms.

Notice triggers
Both ECOA and FCRA require sending notices to consumers when taking adverse action. The action is the trigger for sending the notice. However who gets the notice is now the primary difference between the two laws. ECOA allows creditors to send one notice, even if there is more than one applicant. This permission is based on the assumption that if several people apply together for credit, they will be in communication and can share the information about the decision.

The recent interpretation of FCRA does not allow one notice to serve all customers whose credit reports were used for the denial. Because the FCRA protects individual consumers' rights with regard to how information about them is obtained and used, the FCRA adverse action notice must go to each consumer whose report was used in the decision to deny.

Examples
When and how to send notices is thus very confusing. There are several principles. First, when adverse action is taken, ECOA requires that someone get a notice. If the adverse action was based on a poor credit history reflected in the credit report of one or more applicants, then FCRA requires that those consumers whose credit reports were used to deny the application receive a notice. Applicant's with good credit need not get the FCRA notice but could be the one selected to receive the ECOA notice. If there is a single applicant and that applicant's credit report reveals problems, the creditor should send that individual a combined ECOA/FCRA notice.

If there are two applicants, John and Mary Doe, and both of them have credit reports indicating credit problems, the creditor should send an ECOA notice to either John or Mary and a FCRA notice to both John and Mary. On the other hand, the creditor could send two combined ECOA/FCRA notices, one to John and one to Mary. Both applicants should receive their own FCRA even if they live at the same address and even if they are married to each other.

Now it gets more complex. Where there are two applicants, Robert and Roberta, and Robert has bad credit and Roberta's is good, how should you send the notices? Robert must get a FCRA notice. One of them must get an ECOA notice. The easiest thing to do would be to send the combined ECOA/FCRA notice to Robert. Now let's look at the application from Tom, Dick and Harry for a business loan. The bank is denying their application because Tom's credit history shows some serious problems (his last business venture failed and he went bankrupt) and because the business plan doesn't show adequate income to support the loan. How should we give notices? We can take care of everything with one notice to Tom, including both ECOA and FCRA information because Tom is the only applicant who needs to receive the FCRA notice.

If the facts are slightly different and both Tom and Dick have bad credit, we will need to send at least two notices. One adverse action explaining the decision and the reasons for it (the ECOA notice) can go to any one of the three applicants. However, in this example, we need to send an FCRA notice to Tom and to Dick. We used credit reports - showing credit problems - for both Tom and Dick. Therefore, both Tom and Dick must receive the FCRA notice. We can combine the ECOA notice with one of these FCRA notices or with both of them. But in this example, one combined notice won't be enough to comply with FCRA.

ACTION STEPS

Review your adverse action notices. Look for all situations where more than one FCRA notice should have been sent. Consider how to describe these situations in your procedures. Collect examples to use in training.
Before you revise your procedures for providing adverse action notices, talk with those involved in the process now. Find out from them what is likely to work and what won't work. Then revise your procedures.
Schedule training soon on adverse action notices. Prepare some specific examples to use as exercises. Practice makes better.