Loan Modifications, Skips, and Adverse Action Notices
The compliance team has recently blogged about ways in which the current regulations permit credit unions to provide relief to affected borrowers during the COVID-19 national emergency:
- Mortgage Loan Modification After Forbearance;
- Skip a Pay Part II: Closed-End Loans;
- Mortgage Loan Forbearance Agreements and COVID-19; and
- Allowing Your Members to Skip a Payment (Or Two) on Open-End Credit.
Last year the compliance team wrote several blogs and articles about adverse action notices:
- When to Include a Credit Score on Adverse Action Notices;
- What to do when you don’t: Let’s talk about Adverse Action Notices;
- Adverse Action Notices for Cosigners;
- Joint Applicants and Adverse Action Notices;
- Prequalifications and Adverse Action Notices; and
- Adverse Action Notices: NCUA Supervisory Priority for 2019.
Today's blog merges the two worlds and discusses what may be required if your credit union denies a member's request for a loan modification or a payment deferral on a credit account. Depending on the facts and circumstances, Regulation B may require the credit union to send an adverse action notice to a member who requested a modification or payment deferral but was denied. Allowing a member to defer payment of a debt falls under Regulation B's definition of credit in section 1002.2(j). The Consumer Financial Protection Bureau's (CFPB) Equal Credit Opportunity Act (ECOA) supervision and examination manual confirms that "a loan modification is itself an extension of credit and subject to ECOA and Regulation B." Moreover, Federal Reserve Board (Federal Reserve) guidance from the last economic recession also explains that a loan modification would constitute an extension of credit under Regulation B.
Section 1002.2(c)(1) defines adverse action as "[a] refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered." Accordingly, denying a member's request for a loan modification or a payment deferral would seem to fall squarely within the definition of adverse action.
The analysis, however, does not end there. The Federal Reserve's guidance can help credit unions understand whether denials of requests for loan modifications or other types of payment deferrals might trigger the adverse action notice requirements in Regulation B.
The guidance notes that whether Regulation B requires an adverse action notice may depend on whether a credit union receives an application as defined by Regulation B. Last year's blog - Prequalifications and Adverse Action Notices - goes into more detail about this issue and explains the difference between when a credit union might be dealing with an inquiry and when the credit union might be dealing with an application for the purposes of Regulation B. The guidance succinctly describes the line between the two: an inquiry becomes an application for the purposes of Regulation B if a credit union "'evaluates information about the consumer, decides to decline the request, and communicates this to the consumer . . . .'"
The guidance points out an additional relevant factor - whether the borrower is currently delinquent or in default. Under section 1002.2(c)(2)(ii), adverse action does not include any action taken with respect to an account that is delinquent or in default. Therefore, the Federal Reserve's guidance notes that Regulation B would not require an adverse action notice for denials of requests for loan modifications when the accounts are delinquent or in default. Even when an adverse action notice might not be required, the Federal Reserve's guidance notes that some kind of written notice communicating the denial might be helpful.
One final thought: a credit union may have an independent obligation under the Fair Credit Reporting Act (FCRA) to send an adverse action notice as well. The FCRA's definition of adverse action under section 1681a(k) of title 15 of the United States Code includes anything that constitutes adverse action under the ECOA and Regulation B. Section 1681m(a) of title 15 of the United States Code requires an adverse action notice when adverse action is taken based in whole or in part on any information in a consumer report. To the extent the credit union denied the request for a loan modification or payment deferral based in whole or in part on any information in a consumer report, the FCRA might also require an adverse action notice. Appendix C to Regulation B provides sample notification forms that satisfy both the Regulation B and FCRA adverse action notice requirements.