What You Need to Know If You Deny Credit

Over the past few years, the economy has hummed along and picked up speed. As the economy recovered credit standards relaxed a bit. Also, credit departments hired new staff who do not remember the Great Recession in terms of how it impacted the construction industry. While not wishing to sound like a harbinger of doom, historical data would suggest we are due for a blip in the economy. Whether that blip arises from the Coronavirus or fundamental economic cycles, it is reasonable to use the remaining “good times” as an appropriate time to re-visit and remind yourself and your department what needs to happen if a credit application arrives on your doorstep and does not meet your credit criteria. And maybe, remind everyone what the thresholds for extending credit are and why they exist.

Most of those who receive this newsletter extend primarily commercial credit and have provisions in the credit application requiring the applicant to confirm that purchases are for commercial purposes only. That being noted, it is still worth remembering that if a consumer applicant sneaks in, the world of the Fair Credit Reporting Act kicks in and an Adverse Action letter is required in order to alert consumers of negative information on their credit reports – or whatever caused the rejection, cancellation or change in credit status.

For commercial accounts, the Equal Credit Opportunity Act (ECOA), as implemented by Regulation B, provides a requirement for notice for adverse actions related to a commercial credit account. Pursuant to Regulation B, an adverse action is:

• 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 under different terms), and the applicant uses or expressly accepts the credit offered;
• 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
• A refusal to increase the amount of credit available to an application who has made an application for an increase.

Regulation B also specifically delineates what is no adverse action:

• A change in the terms of an account expressly agreed to by an applicant;
• Any action or forbearance relating to an account taken in connection with inactivity, default, or delinquency as to that account;
• A refusal or failure to authorize an account transaction at point of sale or loan except when the refusal is a termination 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 when the refusal is a denial of an application for an increase in the amount of credit available under the account;
• A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested; or
• A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested.

So, if your company decides to deny a credit application, make certain you have a solid adverse action letter that you send to the applicant which explains the basis for the denial. An attorney can assist you in developing such a letter and in formulating a policy which complies with Regulation B in terms of issuing such a notice.

In the meantime, if you would like to root around in Regulation B, here is a link to it, or you can simply Google “ECOA and Regulation B.”