Compliance Blog

Written by Alma Calcano, Regulatory Compliance Specialist, NAFCU

Hi everyone. My name is Alma, and I am a new member of the Regulatory Compliance team here at NAFCU. Some of you may have met me in person at the Regulatory Compliance School last month. If you missed it, don’t worry! Summer Regulatory Compliance School is only a few months away.

I wanted my first blog to be about a topic that has always been exciting to me and – let’s be honest – we all have struggled with at some point: Adverse Action Notices! Particularly, untimely or incomplete notices.

Before diving in to the rule, it’s helpful to start with a hypothetical scenario: Members Meredith and Christina each apply for a $10,000 personal loan at Seattle Federal Credit Union. After a couple of days, the credit union denies both applications. Loan officer Alex prepares and mails various adverse action notices, including one to Christina. Christina received her adverse action notice 4 days later. Then a few weeks later, while cleaning up his desk, Alex realizes he forgot to mail Meredith’s adverse action notice and it has been over 30 days since the application was denied. Due to his mistake, he decides to check all the notices he mailed that month and realizes that he also failed to complete one of the sections in the notice sent to Christina. What should the credit union do?

What can a credit union do when it doesn’t disclose required information or send a notice at all? Should the credit union send Christina a revised notice? Should the credit union send Meredith a notice even after 30 days of the action taken? Can the credit union simply do nothing? Are there any penalties or consequences? Is there any safe harbor? Hopefully after reading this post you would have some clarity. Let’s dive in!

Both the Fair Credit Reporting Act (FCRA) and the Equal Credit Opportunity Act (ECOA), which is implemented by Regulation B, regulate adverse action notices. Because of different coverage rules, an adverse action may be required under one law but not the other. Sometimes providing notice under both laws is required.

Timing Errors Under the FCRA

Regarding timing of the notices, the FCRA does not include detailed timing requirements for adverse action notices, while Regulation B does include such requirements. Since there is no requirement to send the notice within a particular time frame, it can be difficult to determine when a notice becomes late under the FCRA. If a credit union determines it did not properly comply with the rule, section 1681m(c) explains that the credit union won’t be liable if it maintains proper procedures. As a result, this regulation does not so much provide a safe harbor as it does allow the credit union to limit potential liability by showing that proper procedures to prevent the error are in place.

Timing Errors Under Regulation B

Typically, credit unions include the disclosures required under both Regulation B and the FCRA in one adverse action notice when both notices are required. For these combined notices, section 1002.9(a)(1) timing requirements apply:

“A creditor must notify the applicant of adverse action within:

• 30 days after receiving a complete credit application;
• 30 days after receiving an incomplete credit application;
• 30 days after taking action on an existing credit account;
• 90 days after making a counteroffer to an application for credit if the applicant does not accept the counteroffer.”

Regulation B states “a creditor's failure to comply with §1002.6(b)(6) [credit history], §1002.9 [notifications], §1002.10 [furnishing of credit info], §1002.12 [record retention] or §1002.13 [information for monitoring purposes], is not a violation if it results from an inadvertent error. On discovering an error under §§1002.9 and 1002.10, the creditor shall correct it as soon as possible…”   See, 12 CFR §1002.16 (c).

The official staff interpretation of the rule clarifies the definition of an inadvertent error by explaining that: “inadvertent errors include, but are not limited to, clerical mistake, calculation error, computer malfunction, and printing error. An error of legal judgment is not an inadvertent error under the regulation.” See, Official Staff Interpretation of §1002.16 (c)-1. While these issues are not common, if a credit union concludes that its failure to timely send an adverse action notice was the result of an inadvertent error, then such failure would not seem to be considered a violation of the regulation. However, the rule requires the credit union to correct the error as soon as possible. In contrast, if a credit union concluded its failure was not the result of an inadvertent error, but of some other kind of error, then such failure would be considered a violation under the regulation.

Inaccurate or Incomplete Notices

It is unclear whether or not credit unions are required to send revised adverse action notices in situations where an adverse action notice timely sent by a credit union did not contain all the required disclosures. A conservative approach would seem to be to provide a corrected notice as soon as possible. In absence of guidance, this would ultimately be a business decision that the credit union may consider making. The credit union may also consider discussing this with its local counsel.

Keep in mind, the rules do not provide credit unions with an opportunity to “cure” the non-compliance by sending revised adverse action notices or by sending untimely adverse action notices to consumers. However, providing a corrected or a late notice may be better received by examiners, members and potentially the courts than not addressing the issue. From an examination perspective, since failure to follow the adverse action rules is a technical violation of the regulation(s), examiners may still consider this a finding. Thus, in the event an error – inadvertent or not – has occurred, it may be helpful to show that the credit union identified the problem and assessed the issue to ensure it does not happen again. Also, don’t forget this is an NCUA supervisory priority, so this may be a good time to dust off your credit union’s procedures.

That’s all for now, blog you later!