my question if the denial reason does not appear to have any relationship to credit report information, would you agree that FCRA box should not be checked on Reg B-Adverse action notices?
Example- loan officer runs a credit report, it is used in the underwriting decision, but the denial reason is - value or type of collateral not sufficient. I think FCRA box should not be checked. If it is checked, then the denial reasons should reflect that. Could overdisclosing be a violation? If so, could you give a reference?

Please read this post for a lengthy discussion on disclosing the use of a credit report:
http://www.bankersonline.com/ubbthreads/showflat.php?Cat=&Board=lending&Number=18496&page=&view=&sb=&o=&fpart=1&vc=1

If the credit report did not adversely impact the credit decision, the FCRA box should not be checked. However, when I read your post carefully, I wonder if the loan officer is disclosing all of the reasons for denial. In other words, if the loan officer marks the "value of collateral" box and nothing else but the credit report also shows delinquent prior obligations, then the loan officer should mark "delinquent with others" and the FCRA box.

David makes a very valid point, because theoritically, the adverse action notice tells the applicant what they need to correct to obtain the loan. So. if you only check "value of collateral" and the applicant brings more acceptable collateral to the table, you can't turn around and now tell him he is denied due to prior delinquent obligations when you already looked at the credit report.

Thank you for the clarification.
Well, in some cases, value or type of collateral insufficent will be the only reason, and the box is still checked.

Checking the box would be in error and should be corrected. I have seen this as a common cited problem during compliance exams in which I have been involved.

Meryem: If the loan officer is marking all reasons and none of the reasons have anything to do with info. form the credit report, the FCRA box should not be marked. I think the commentary to section 202.9(b)(2)#9 will help you clarify this issue:

Combined ECOA-FCRA disclosures. The ECOA requires disclosure of the principal reasons for denying or taking other adverse action on an application for an extension of credit. The Fair Credit Reporting Act requires a creditor to disclose when it has based its decision in whole or in part on information from a source other than the applicant or from its own files. Disclosing that a credit report was obtained and used to deny the application, as the FCRA requires, does not satisfy the ECOA requirement to disclose specific reasons. For example, if the applicant’s credit history reveals delinquent credit obligations and the application is denied for that reason, to satisfy §202.9(b)(2) the creditor must disclose that the application was denied because of the applicant’s delinquent credit obligations. To satisfy the FCRA requirement, the credit must also disclose that a credit report was obtained and used to deny credit. Sample forms C-1 through C-5 of Appendix C of the regulation provide for the two disclosures.

Thanks David! This is great information. I have attended CFT Compliance School last year and had a chance to attend one of your sessions. I recommend that school to anyone who is new to Compliance like me.

Two quick things, related to the answering posts. RL said, "Checking the box would be in error and should be corrected". Don't go back on existing denials, but correct the procedure from this date forward.

And while you should list other reasons that contribute to the denial decision, {202.9(b)(2)} listing more than 4 is not judged to be helpful. I recommend listing the most severe and least correctable. That avoids them coming back to the table and being told no again, for different reasons.

To sum up all these correct responses, the lender should give all of the "principal and specific" reasons for denial. This means every reason that contributed to or caused the denial. It could be both the collateral and the credit.

The lender should not give reasons that did not contribute to the denial. Many lenders believe they should check the FCRA box if they pulled a credit report. No, No! This box should only be checked if information in the report contributed to the denial.

In other words, loan officers should know why they made their decisions.

Regulation B requires giving at least one reason, up to all of the reasons for denial. The regulation permits you to stop after giving 4 reasons. I have seen notices with 6 or 7 reasons. They were not violations -- in fact, they were correct.
FCRA only requires notification if the information for the denial came from the report. If it didn't, then there is no FCRA notice.

Now I'm switching topics, but I like the way Lucy stated:

The regulation permits you to stop after giving 4 reasons. I have seen notices with 6 or 7 reasons. They were not violations -- in fact, they were correct.

The regulation states in the Commentary to section 202.9(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.

I have seen examiners cite banks for disclosing more than 4 reasons on a denial. This has always been an area that raises my blood pressure. Lucy said it well!

In reply to:

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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.

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My understanding of the reason behind this notation in the Commentary is that how many different ways do you need to tell someone they're a LOSER! Perhaps the regulators were concerned about the self-esteem of the applicant?

Personally I think 6 or 7 reasons is a bit of overkill or perhaps vindictive, but sometimes you have a customer that needs to be told, in no uncertain terms - NO!

When would you pull a credit report, but then deny for other reasons? You would not pull a credit report if you had other reasons to deny, right? Isn't this an unlikely scenario that you pull a credit report and then discover a reason for denial that you did not already have in the file. But, if you already had a reason for denial in the file, why did you pull the credit report? Or are credit reports automatically pulled for every application for credit?

This entire topic was covered already in a prior thread. Late hour weariness prevents me from searching for it and linking to it from here.

Bottom line, there are MANY places that have an assembly line process in which when an application is received, a credit report pulled. The package is then sent along to underwriting for analysis. It is during that underwriting phase that the denial reason becomes apparent. It may be the appraisal comes in too low, or perhaps the residency is too short. Perhaps the employer verifies a lower salary than the applicant states in which case you must give the "Other Information" disclosure.

On our Consumer Adverse Action notices, we have a box to check that indicates a credit report WAS pulled but did not contribute to the declination.