Adverse Action Notice When Bank Declines Request for Deferment

Issue/Inquiry

If a commercial borrower requests a loan payment deferral due to the COVID-19 crisis and the Bank declines the request, must the Bank provide an Adverse Action Notice to the borrower?

Response Summary

The request by a borrower for a deferment of payments on an existing loan is a request for credit and would be considered an application for credit under Regulation B if the request satisfies the Bank’s procedures for what constitutes an application for that type of credit. If an application for credit has been made and the Bank refuses to grant it, the Bank must provide an Adverse Action Notice, unless the borrower was delinquent or in default when the application was made.

Response Detail

Regulation B, which implements the Equal Credit Opportunity Act, requires a creditor to notify the applicant when there has been action taken on an application. 12 CFR 1002.9(a)(1).

Whether the Bank is required to notify the borrower of the adverse action taken will depend upon whether a deferment of payments is considered an extension of credit, whether an application has been made for such credit, and whether the Bank has refused to grant it.

Under Regulation B, the term “credit” includes “the right granted by a creditor to an applicant to defer payment of a debt [or] incur debt and defer its payment.” An “extension of credit” is “the granting of credit in any form (including, but not limited to, credit granted in addition to any existing debt…or the continuance of existing credit without any special effort to collect at or after maturity).” 12 CFR 1002.2(j),(q).

The official commentary states that Regulation B covers a wider range of transactions than Regulation Z. A transaction is considered a credit if there is a right to defer payment of a debt, regardless of whether the credit is for personal or commercial purposes, the number of installments required for repayment, or whether the transaction is subject to a finance charge. Official Interpretations, 1002.2(j) – 1.

For the purpose of Regulation B, a deferment of payment would be considered an extension of credit in that the borrower had promised to repay a debt according to certain terms and is now requesting to pay the debt later. Therefore, allowing the borrower to defer payment of an existing credit or extending the repayment of the principal would be considered an extension of credit in addition to the existing credit.

The Bank’s application process will determine whether the borrower’s request for a deferment of payments is considered an “application” for an extension of credit. Under Regulation B, an “application” is “an oral or written request for an extension of credit that is made in accordance with the procedures used by a creditor for the type of credit requested. The official commentary states that “[a] creditor has the latitude under the regulation to establish its own application process and to decide the type and amount of information it will require from credit applicants.”

However, the federal examiners look to the creditor’s actual practices in determining whether a request is an application. For example, if the creditor has a procedure for only accepting written applications, but makes a credit decision on an oral request for credit, the creditor will be deemed to accept both written and oral applications. 12 CFR §1002.2(f); Official Interpretations, 1002.2(f) – 1,2.

In this case, if the borrower has submitted sufficient information under the Bank’s procedures to be considered an application, then the borrower has submitted an application for the purposes of Regulation B.

An “adverse action” under Regulation B includes “a refusal to grant credit in substantially the amount or on substantially the terms requested in an application.” In order to determine when an inquiry becomes an “application” subject to the adverse action requirements, the official commentary states that if the creditor “evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry…as an application and must then comply with the [adverse action] notification requirements under section 1002.9.” 12 CFR 1002.2(c)(1)(i); Official Interpretations, 1002.2(f) – 3.

If the borrower has requested a deferment of payments and the Bank has refused to grant the request, then the Bank has taken adverse action on the request and must notify the borrower of the action that it has taken.

There is one exception to these requirements, as Regulation B does not require a creditor to provide an Adverse Action Notice to a borrower whose account is currently delinquent or in default. 12 CFR 202.2(c)(2)(ii); Official Interpretations, 1002.2(c)(2)(ii) – 2.  

However, even if an Adverse Action Notice is not required under Regulation B, a borrower may find it helpful to receive information from the creditor regarding why the borrower’s request was declined.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, April 27th, 2020 at 9:35 am.