In our Federal Law Friday series, each week we review a different Federal law that should be covered by a finance company’s policies, procedures and compliance management system. This week, we review the Adverse Action Rules.

Many Federal consumer financial rules fall in one of two categories, either policy rules or disclosure rules. Policy rules require companies to adopt internal written policies.  The Red Flags Rule and the Furnisher Rule are examples of policy rules.  Disclosure rules, on the other hand, require companies to provide consumers with disclosures in a transaction.  Examples of disclosure rules include the Gramm-Leach-Bliley Privacy Rule and the Risk-Based Pricing Rule.  In today’s Federal Law Friday post, we review another set of key disclosure rules—the Adverse Action Rules.

The Adverse Action Rules are comprised of provisions from two laws: the Equal Credit Opportunity Act (ECOA) (which we briefly discussed here) and the Fair Credit Reporting Act (FCRA).  Under the Rules, a finance company is required to give a written notice to the consumer when taking an adverse action (for example, credit denial, counteroffer that is not accepted, or incomplete applications that cannot be evaluated).  Some companies call this a “turn down notice.”  Regulation B includes several different model forms that give safe-harbor protection.

Other key provisions of the Rules include:

  • Generally, a company has 30 days to send the adverse action notice. The notice needs to either list the specific reason why the adverse action was taken (for example, bankruptcy or inability to verify employment or income) or give the consumer the right to request specific reason for the adverse action within 60 days.
  • If the adverse action is based on information from a consumer reporting agency or another company, the adverse action notice needs to include additional disclosures that are in the Regulation B model forms.
  • Under Section 1100F of Dodd-Frank, if a company uses a credit score is taking an adverse action, the adverse action notice must include the score and other related information. Many finance companies may be unaware of this new requirement.
  • If the company makes a counteroffer that is not accepted, an adverse action notice must be sent within 90 days of making the counteroffer. However, if the company uses a combined adverse action/counteroffer form when initially making the counteroffer, no additional notice is required.
  • If an application is incomplete, a company can either send an adverse action notice or a separate notice of incompleteness.
  • Companies need to keep copies of adverse action notices for at least 25 months.

Be sure your practices, procedures and notices are in compliance with the Adverse Action Rules. Otherwise, your adverse actions can have adverse consequences.