Hello - I would like feedback from others on their procedures for disclosing denial reasons on their Adverse Action Notices for loans.

At our bank, I am the "secondary review" and ensure the reasons that the loan officer selected can be verified in the file. If I see that some reasons have been left off when they "jump out at me" (ex: seeing many delinquencies or collection items on a credit report) I will typically add them to the reasons. Our bank has "consumer credit grade" guidelines that outlines things like the customer could qualify for our lowest credit grade rating if they have delinquencies but they are over 2 years old. If the customer's delinquencies were reported in the last 2 years, then they wouldn't be able to qualify. So if I see those delinquencies on a credit report I will add them to the denial reasons.

I recently had an officer who questioned why they should need to dig deeper. Their stance is that if they are reviewing the info on the customer and come across the first reason that would disqualify/deny the customer, then that's all they should put...because they know the customer would be denied and looking further at the file wouldn't qualify them.
For example, when the officer came across the "collection" items, they stopped there and sent the file up for the AAN. When I looked at the file and confirmed collection items on the credit report, I noticed many delinquencies in the last two years, so I spoke with the officer and let them know I added the delinquent reason as well.

My stance is that we should list the main reasons for the customer (up to 4, per the Official Interpretation of 1002.9(b)(2). To me, if we just listed the 1st reason that disqualified the customer, the customer might think that all they need to do is pay their collection items and then could get the loan. In actuality, the customer couldn't have gotten the loan because they also had recent delinquencies and would need to make sure those were taken care of and wait to reapply.

Thoughts? Thank you.

I'm with you--if there are 4 reasons for the denial and the LO stops after finding the first one.....and the customer fixes that problem and comes back in, they're going to get denied again (3 more times, evidently). This leads to confusion and misleads the applicant IMO--the applicant should be told ALL the reasons they are being denied (with the 'up to 4' caveat that you cited).

I agree with you mostly. I don't think a loan officer needs to waste time completely underwriting a loan just to find all of the reasons they might deny them. If they have 2, 3, or more reasons, they should list them, but they don't have to keep going. On the other hand, I don't think it's right to list only 1 reason if you have the information available and you know it would also lead to a denial.

On a related note (this is one of my pet peeves): The Commentary to 1002.9(b)(2) doesn't say you can't list more than 4 reasons. In fact, the it states the regulations "does not mandate that a specific number of reasons be disclosed." Then it goes on to say that disclosing more than 4 is not likely to be helpful. That doesn't prohibit you from disclosing 5. If you read it that way, you're ignoring the first half of the sentence. Here's the Commentary:

A creditor must disclose the principal reasons for denying an application or taking other adverse action. The regulation does not mandate that a specific number of reasons be disclosed, but disclosure of more than four reasons is not likely to be helpful to the applicant. [Commentary to §1002.9(b)(2) #1]

Here's my plain English explanation:
You should disclose ALL of the primary reasons for denial. If you want to stop at 4, you can. It's rare, but you can list 5, 6 or more, if applicable.

I agree 110% with David.

Looking at an AAN in a positive way is that if you fix the things we list, we'll make you the loan. I've had some regulators say that if you list all the reasons, it looks like you're "bayoneting the wounded", and discouraging them from ever applying with the bank again. After explaining (and it was in procedures) that the intent of the AAN was to explain the reasons the reasons why the applicant did not get the loan and if they fixed them, it would be our intent to make them the loan, they agreed.

I've heard that too. The problem with that logic is it disregards what Reg B says about mandating the number of reasons disclosed. Many examiners (and compliance officers/auditors) read the second half of the sentence and allow it to dictate a non-existing rule.

I've always just looked at it as......the regulation says it's a best practice to stop at 4.....so we stop at 4.

....tacking this on for opinions.

Officers here at my bank, will obtain the credit report first. If information on the report means a denial, they stop there. They DO provide ALL the reasons found in the report, such as "limited credit experience" "no credit file" "collections" "delinquencies" "bankruptcy" etc. They do NOT then calculate a DTI figure, even though DTI might be a reason for denial. I have generally not questioned this. Here, officers calculate the DTI by completing an intricate worksheet that has lots and lots of information and blanks to fill in. So, they don't want to go "to all that trouble" for a loan that can't happen.

@ Swiggles: thank you! That is generally how we are as well.

On the surface, I don't disagree. My point is that it isn't a violation if you go beyond 4. Many examiners think it is.
I dont' think this is a "best practice". It's a relief - you don't have to, but you can. The regulation doesn't say "you shouldn't".

I also agree with swiggles about stopping at the credit report. You don't have to calculate DTI and give that as a reason too. You know you aren't going to make the loan based on what you know at this point. Stop and tell them why. If you were to do the DTI calculation and it didn't pass, you should tell them about the credit report issues too.

Ok...but it doesn't really say "you don't have to report more than 4 reasons"....it says (paraphrasing ) "more than 4 reasons isn't likely to be useful to the applicant". To me, that's them telling you a "best practice" (i.e. 'mr. banker--it's really not useful to list more than 4 denial reasons, so it's best to stop at 4'). But yes, i agree....reporting more than 4 isn't a violation, as it doesn't explicitly say "thou shalt not list more than 4 denial reasons".

I have NEVER been able to figure out why ALL reasons for denial wouldn't be useful to an applicant. If a reason is present, the applicant needs to know what it is so that he/she can fix the problem. What is NOT useful is to fail to tell the applicant all of the reasons. The applicant fixes/corrects the reasons you told them about and then re-applies. Then the lender has to say, "OK good. You fixed all that, but now we have another reason to deny you. We couldn't inform you of it when you applied previously because legislators/regulators don't think it would have been useful to you."

~steps down off soapbox~

Swiggles, regulators were concerned that if there were a litany of reasons, it would be tantamount to discouragement. Same reasons teachers are discouraged from marking up tests with red ink.

How can it be discouragement if the bank is providing legitimate reasons why it can't loan a person money? I understand what you are saying and where it is coming from. My point of view is the same, though. It makes absolutely no common sense and defies reason for what the Reg says to do.....which is to tell the customer ALL of the reasons for denial.

To date....and I have been doing this for a long, looooong time.....I have never seen an adverse action form where there were more than four reasons for denial, where we would have to debate regarding whether to tell the truth and disclose more than four or leave one off (the bank's choice, I guess).

I agree it's rare, but I have seen a few. Of course, I've been doing this for 28 years (as an examiner and a consultant with hundreds of clients) so I've seen lots of denials.

My logic: They don't want people jumping off of bridges because you marked so many boxes and they feel they have no reason to live.
Honestly: I don't know what the logic is behind not telling them all reasons. I have a motto "being unclear is unfair". I don't see telling someone 5, 6, 7, ... reasons is anything but being clear. To stop at 4 is unfair because you're being unclear. Again, very low odds, but what if you told them 4 and they fixed them all. Wouldn't you then be discouraging them when they come back and you list the other reasons?

Concur that the AAN should tell the applicant what they need to fix to improve chances of approval next time they apply. TO give them one reason, the later deny for other reasons that existed with the previous application is unfair, IMO.

This was one of those classic cases where uncertainty drove bankers crazy. As an industry, we asked for an official number and the Fed gave us one.

Can you clarify if you MUST disclose more than one reason for denial? Can you select one reason and leave it at that?

You must disclose all of the principle reasons for denial. If there was just one principal reason, that is fine. If, however, there were more than one, you should list all principal reasons (typically not to exceed four). The idea is to tell the applicant what they need to fix in order for you to do the loan, so just picking a single reason out of a few wouldn't accomplish that.

From the commentary:

Paragraph 9(b)(2).
1. Number of specific reasons. A creditor must disclose the principal reasons for denying an application or taking other adverse action. The regulation does not mandate that a specific number of reasons be disclosed, but disclosure of more than four reasons is not likely to be helpful to the applicant.

As §1002.9(b)(2) states, "A creditor must disclose the principal reasons . . .". Like Adam, I insert the word "All" in place of "the". "A creditor must disclose ALL principal reasons . . .". Otherwise, you may have a potential discouragement issue.

Imagine you have 3 principal reasons and only list 1, what happens if the applicant fixes the 1 disclosed reason? If they reapply, would you then list the 2nd reason? And if they fix that issue, and reapply, do you then list the 3rd reason. If you know of more than 1 reason, you should list them.

However, you don't have to research everything so you can come up with all possible reasons. For instance, if I haven't yet pulled a credit report and I see the DTI is excessive, I would just list "excessive obligations." I don't have to pull the applicant's credit report to determine other reasons I might use to deny the applicant. If the applicant pays off some debts and reapplies and then I pull the credit report, it isn't wrong to then list credit issue.