Compliance Blog

When it comes to providing required disclosures and notices, compliance officers know they need to send them, but a question that often comes up is: Whom do you need to send them to? This NAFCU blog covers joint owners and applicants and this NAFCU blog covers adverse action notices for joint applicants. Today’s post covers whether a cosigner needs to receive an adverse action notice. Adverse action notices can be required under both Regulation B and the FCRA so both will be addressed, starting with Regulation B.

Section 1002.9(a) of Regulation B requires adverse action notices anytime a credit union takes “adverse action” against an “applicant.” Adverse action includes denying an application or credit limit increase request, terminating an account or making an unfavorable change to the account terms. An applicant is the “person who requests or who has received an extension of credit.” This definition goes on to explain a guarantor or cosigner is only considered an “applicant” under section 1002.7(d), which covers when a spouse or other person may be required to sign a credit or security instrument.

As a cosigner is not considered an “applicant” for purposes of the notice requirements, a cosigner does not need to receive an adverse action notice. It does not matter whether the applicant’s or the cosigner’s creditworthiness is the basis for the adverse action. However, if an adverse action notice is required, the notice must still be sent to the “applicant.”

Under section 1681m(a) of the FCRA, adverse action notices are required anytime a credit union takes “adverse action” against any consumer based on information in a “consumer report.” Because of this description in the rule, the analysis under the FCRA generally turns on whether a credit report was pulled; however, there is a special rule for cosigners.

While adverse action has a more expansive definition under the FCRA, the FCRA looks to Regulation B for what constitutes adverse action in the credit application context. In other words, when it comes to credit applications, if it’s not adverse action under Regulation B, then it’s not adverse action under the FCRA. As a result, since a cosigner does not get an adverse action notice under Regulation B, it appears he does not get notice under the FCRA either, even if his credit report is pulled. This interpretation of how Regulation B is applied to the FCRA is discussed in the preamble to the Federal Reserve’s 2011 final rule on adverse action notices:

“Under section 701(d)(6) of the ECOA and § 202.2(c) of Regulation B, only an applicant can experience adverse action. Further, a guarantor or co-signer is not deemed an applicant under § 202.2(e). Sections 603(k)(1)(A) and 603(k)(1)(B)(2) of the FCRA provide that adverse action has the same meaning for purposes of the FCRA as is provided in the ECOA and Regulation B in the context of a credit application. Therefore, a guarantor or co-signer would not receive an adverse action notice under the ECOA or the FCRA. The credit applicant would, however, receive an adverse action notice, even if the adverse action decision is made solely based on information in the guarantor's or co-signer's consumer report.” (Emphasis added.)

The FTC also relied on this interpretation in its FCRA compliance guide:

“Section 615(a)

[…]

2.      ADVERSE ACTION INVOLVING CREDIT

[…]

B.     Multiple applicants. When there are two applicants, a creditor must provide an adverse action notice to both applicants if the application is denied, even in part, based on information in a co-applicant’s consumer report. However, a creditor need not provide a guarantor with an adverse action notice, even if the application is denied in whole or in part based upon information from the consumer report of the guarantor. Regulation B states that only an “applicant” can experience “adverse action” in a credit context and excludes a guarantor from its definition of “applicant.” 12 CFR Part 202.2(c)(1) and (e). See comment 603(k)(1)(A)-3.” (Emphasis added.)

This FTC Advisory Opinion reiterates the FTC’s position on adverse action notices for guarantors. Based on this existing guidance, a cosigner would not need to receive an adverse action notice even if his credit is pulled. However, interpretive authority for both Regulation B and the FCRA has since been transferred to the CFPB and they have not issued any new guidance on these provisions. In the absence of any CFPB guidance, I understand many credit unions continue to look to the Federal Reserve and FTC interpretations for insight.