Consumer Compliance Outlook: Fourth Issue 2024

Top Federal Reserve System Compliance Violations in 2023 Under the Equal Credit Opportunity Act

By Consumer Compliance Outlook Staff

The Equal Credit Opportunity Act (ECOA), as implemented by Regulation B, requires creditors to notify consumers and businesses applying for credit about the action taken on their applications within specified time periods. If adverse action¹ is taken, the creditor must provide an adverse action notice (AAN) disclosing the reasons for taking adverse action, the key factors affecting an applicant’s credit score if it was used in the credit decision, and the contact information for the lender’s primary federal regulator.² An AAN provides transparency to applicants about the credit underwriting process and helps protect them against potential credit discrimination by requiring creditors to specify the reasons for taking adverse action and the contact information for the creditor’s federal regulator if the applicant believes discrimination occurred and wants to file a complaint.

Violations of the AAN requirements were among the Federal Reserve’s top-cited compliance violations in 2023. This article reviews the violations and sound practices to mitigate risks. The format for common violations articles is to list the regulatory requirements (either by quoting the text or by summarizing it) and then discuss the specific violations, root causes, and sound practices.

REGULATORY REQUIREMENTS

Adverse action definition: 12 C.F.R. §1002.2(c)(1)

(i) 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;

(ii) A termination of an account or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts; or

(iii) A refusal to increase the amount of credit available to an applicant who has made an application for an increase.

Time periods for notifying an applicant of the action taken: 12 C.F.R. §1002.9(a)(1)

30 days after receiving a completed application;

30 days after taking an adverse action on an incomplete application, unless notice is provided under §1002.9(c);

30 days after taking adverse action on an existing account; or

90 days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered.

A common violation was failing to provide an AAN within 30 days after receiving a completed application on which adverse action was taken.

ROOT CAUSES

For consumer credit, a creditor has 30 days after receiving a completed application to notify the applicant in writing of the credit decision. In some cases, violations occurred because staff members did not understand the regulatory requirements of sending a written AAN. Staff believed oral notification complied, where they had notified applicants by telephone and did not send a written AAN. In other cases, staff did not understand the timing requirements. This reflected inadequate training on AAN requirements.

Examiners also noted weaknesses in the monitoring and audit functions, including internal testing or quality control, that should have provided a second line of defense to recognize that loan staff failed to send timely, written AANs.

SOUND PRACTICES TO MITIGATE COMPLIANCE RISKS

Most of the violations discussed occurred because of inadequate oversight by management and a lack of appropriate employee training. The table lists compliance practices that examiners have observed and recommend.

TABLE: Sound Compliance Practices

Board and Senior Management Oversight	Review management information systems, including audit reports, to stay apprised of systemic issues and respond appropriately
Internal Controls	Create a ticker for each loan application to remind staff of the deadline to notify the applicant of the action taken on a completed loan application Review controls to ensure they are working to flag the deadline for sending an AAN
Consumer Complaints	Review complaints received by the institution or by the Federal Reserve Consumer Help complaint system for possible internal control weaknesses for the issues noted in this article, adjusting and strengthening processes as needed to ensure compliance
Training	Conduct regular training on the notice requirements under §1002.9 of Regulation B Identify and train for pain points, such as the effect of incomplete applications or counteroffers on AAN requirements Include training when regulatory changes or procedural weaknesses are noted Provide flowcharts and worksheets for staff
Monitoring and Audit	Conduct frequent audits of loans Validate that all policies and procedures are applied correctly
Policies and Procedures	Implement detailed policies and procedures to ensure a consistent and repeatable process

CONCLUDING REMARKS

This article discusses common ECOA violations and sound practices to mitigate risks related to AANs. Specific issues and questions should be raised with your primary regulator.

ENDNOTES

¹ Adverse action is defined in ECOA,15 U.S.C. §1691(d)(6), and in Regulation B, 12 C.F.R. §1002.2(c).

² 12 C.F.R. §1002.9(a)(2) and (b)(2).