Adverse Action Notice to Guarantor

Issue/Inquiry

The Bank received a loan application from a business entity that offered an individual as the guarantor. The loan request was declined because of the guarantor’s low FICO score. Should the guarantor receive a separate Adverse Action Notice?

Response Summary

Only the business entity would receive an Adverse Action Notice, since neither the Equal Credit Opportunity Act (“ECOA”) nor the Fair Credit Reporting Act (“FCRA”) recognize the guarantor as being an applicant. This is true even when the credit decision is based upon the guarantor’s creditworthiness. The Adverse Action Notice to the business entity would note the credit weakness of the guarantor as a reason for the decline.

Response Detail

Regulation B, which gives effect to the ECOA, requires the applicant to be notified of the action taken on the application, including adverse action. An “applicant” is any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit.12 CFR 1002.2(e),9.

Under Regulation B, notification of the action taken must be given in a timely manner and provide the principle reasons for the adverse action. When an application involves more than one applicant, notification only needs to be given to one of them, but must be given to the primary applicant where one is readily apparent. 12 CFR §1002.9(b)(f).

With respect to the FCRA, Section 615(a) requires that “any consumer” with respect to whom adverse action is taken must receive certain mandated disclosures if that action is based in whole or in part on information from a consumer report. If there is more than one applicant, a separate FCRA Adverse Action Notice must be given to each applicant for whom a consumer report was obtained, providing the consumer report information pertaining only to that applicant.

The disclosures required by ECOA and FCRA can be combined in one disclosure. The requirements of each must be separately fulfilled. For example, disclosing that a credit report was obtained and used in the denial of the application, as the FCRA requires, does not satisfy the ECOA requirement to disclose specific reasons. In addition, disclosing the key factors that adversely affected the consumer’s credit score does not satisfy the ECOA requirement to disclose specific reasons for denying or taking other adverse action on an application or extension of credit. Official Interpretations, 1002.9(f) – 9.

In an advisory opinion, the Federal Trade Commission noted that the FCRA also provides that, in the context of a credit application, “adverse action” has the same meaning for the purposes of FCRA as is provided in the ECOA. As per Section 701(d)(6) of the ECOA (15 U.S.C. §1691(d)(6) and Section 1002.2(c)(1) of Regulation B, such commission determined that only an “applicant” can experience “adverse action”, and that a co-applicant is considered an applicant, but a guarantor is not.

If the guarantor has not experienced “adverse action” that triggers the notice required by Section 615(a) of the FCRA, a creditor does not need to provide the guarantor with an FCRA Adverse Action Notice, even if the application is denied, in whole or in part, based upon information from the consumer report of the guarantor. FTC, Advisory Opinion to Stinneford (07-14-00).

In this instance, Regulation B would require an Adverse Action Notice to be provided to the business entity, which applied for the loan, but not to the guarantor. Even if there had been joint applicants, the Adverse Action Notice would be provided to the business entity, since it was the primary applicant.

In the Adverse Action Notice to the business entity, the Bank would note a lack of credit strength on the guarantor’s end as a reason for the denial. As noted by the Federal Reserve Bank in the legislative history for certain revisions to Regulation B, when a person agrees to be a co-applicant, guarantor, or similar party, there is a general understanding that information regarding that person’s creditworthiness will be shared. Federal Reserve Board, Equal Credit Opportunity, Regulation B, Docket No. R-1008.

Likewise, since the guarantor was not an applicant for the purposes of FCRA, no FCRA Adverse Action Notice would have to be provided to the guarantor.

 

This entry was posted on Monday, December 24th, 2018 at 9:40 am.