By Henry Chuang, Esq.
Regulation B was enacted in 1974 to implement the provisions of The Equal Credit Opportunity Act (“ECOA”). ECOA was enacted in order to prevent discrimination based on race, color, religion, national origin, sex, marital status, age, source of income (such as public assistance), or the applicant’s past litigation under the Consumer Credit Protection Act. Regulation B governs lenders’ and servicers’ conduct. Regulation B focuses on eliminating discriminatory practices and requires notification to be provided when a lender takes an “adverse action.” A failure to provide written notice can subject the lender to sanctions of up to 10,000.00 in individual cases or $500,000.00 in class action suits.
Who is entitled to a notice?
Any person, co-applicant, guarantor, surety, or endorser applying for a loan. This includes trusts, corporations, partnerships, cooperatives, associations, and even government agencies.
Who has to send a notice?
As the statute was created to be broad, it has a sweeping definition of the people covered (ie, who is a “creditor”) and includes any “person who, in the ordinary course of business, regularly participates in a credit decision.” It also includes anybody who even refers any applicants to a creditor.
When does the Notice Have to be Given?
Along with a host of requirements to prevent discrimination, Regulation B requires notice to be given whenever an adverse action is taken. As the name implies, an adverse action is one where the lender denies credit, refuses to increase a credit limit, or terminates or unfavorably changes the term of an account. Within 30 days of denying credit, a lender must give written notice.
If the lender has fewer than 150 applicants per year or a borrower is a business that has less than $1 million in revenues. (Assume gross revenues for compliance purposes.) In those cases, the notice may be oral but still must be given.
What Does the Notice Have to Say?
The notice must contain the name and address of the lender, the lender’s regulating agency, and the reporting agency. In addition, the notice must provide the reason for the action taken or notice that the consumer has a right to the reason for denial.
What if I don’t send a notice?
Failure to comply with Reg B can result stiff penalties. 12 C.F.R. §202.16 provides that along with enforcement actions from the federal government, individuals have a private right of action for a creditor’s failure to comply with Regulation B. The fines can be up to $10,000 in punitive damages in individual cases or the lesser of $500,000 or 1% of a creditor’s net worth inclass action suits. In addition, the applicant can receive actual damages, costs, and attorney fees.
To notify borrowers, here are some practice pointers:
The notice should have the information of the action, information on the creditor and its regulating agency.Provide this information within 30 days of a decision. Don’t forget to send the co-applicant his or her own notice. The Federal Reserve Board has prepared 10 sample notices, available here:
If oral notice of the adverse action is given, keep a written log in the file. Train employees to comply and audit files periodically to make sure it is being done.
Wait, That’s Too Easy!
There is one hurdle to compliance when notifying guarantors of an adverse action. Technically because the guarantor is not the borrower, lenders and servicers may not include them in their Reg B. checklist. However, while Reg B requires notification to the guarantor, the borrower’s financial right to privacy might be implicated—thereby preventing notification to the guarantor unless the borrower has given permission for the guarantor to receive the information.Please consult with your attorney to develop a policy to deal with guarantor situations andhandling borrowers’ private financial information.