Question & Answer

Question: One of the reasons on our adverse action notice form is "Limited credit experience with this bank." Is this a valid reason to deny credit?

Answer: "Limited credit experience with this creditor" can be a valid reason for denial, but there are dangers in using this reason. For example, if the bank denies a loan for this reason but approves loans of the same type to borrowers with no accounts with the bank, there are obvious inconsistencies in how the customers were treated. Any auditor or examiner would have to question the use of that reason. It also opens the door to discrimination by providing a statement that appears neutral to the customer but enables the loan officer to deny credit for other - perhaps not legal - considerations.

This reason is also a concern in today's fair lending environment. Banks are encouraged to find new customers, to lend in communities and to individuals that have been ignored or had limited access to credit. Basing credit decisions on previous relationship with the bank would work against this emphasis on bringing new customers into the bank.

If your adverse action form includes this reason, we recommend that you carefully review your procedures and underwriting guidelines to be sure that the reason is used consistently and fairly and not in lieu of a more accurate statement. This would also be a good time to review your model reasons for adverse action. Discuss the reasons with your loan officers and find out whether they each understand and use the reasons in the same way. Consistency in using reasons is important in making sure that principle and specific reasons are provided to customers.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 3, 1/96