Selecting reasons for declining loans

Question: How do we select reasons for declines and how should we document them? Our examiner criticized us because information supporting the reason was not in the application file.

Answer: Regulation B requires that you provide the applicant with the reasons for adverse action or that you tell the customer they have a right to know the reasons. This means, among other things, that you should know why you denied the loan - that you should have a reason for it. Usually, if you are keeping complete records as required by Regulation B, the reason for denial will be in the file and self-evident. For example, if the application was denied for poor credit, the credit report in the file should reflect credit problems. If the reason is self-evident and the information is in the file, you don't need to do anything more.

It gets more complicated when the reason is not self-evident. For example, the credit report may have been not quite good enough or you have a policy of considering different types of payments - such as large or small obligations - with different weights. If that is the case, the policy should be clearly documented. It is also a good idea to include evaluations or documentation of reasons in each loan file. For many types of credit, a loan officer's work sheet is a valuable tool for managing lending consistency and for documenting compliance.

Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 4, 4/03