The Phone Call That Was Not an Adverse Action Notice
Caleb applies to a Louisiana lender for a cash-out refinance on his home in Metairie. His DTI is 49%, and the automated underwriting system returns an 'ineligible' finding. On day 12 the MLO calls Caleb and says, 'You're declined - your debt ratio is too high, but if you pay off your truck you can reapply.' Caleb asks for something in writing. The MLO says the phone call is enough and closes the file. On day 40 Caleb complains to the Louisiana Office of Financial Institutions. The MLO's file notes the call but contains no written notice, no specific reasons, and no HMDA data. The lender's policy says adverse action notices are sent within 30 days, but the MLO thought the call satisfied it. The MLO also told Caleb that paying off the truck 'would improve his chances' without mentioning that the lender would need to re-pull credit.
1. Did the lender comply with ECOA and Regulation B? Explain the timing, content, and form requirements.
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No. An 'ineligible' automated underwriting finding is an adverse action. Regulation B requires the creditor to notify the applicant within 30 days of receiving a completed application. The notice must be in writing and must include the action taken, the ECOA notice, and either the specific reasons for the adverse action or a statement that the applicant may request the reasons within 60 days. A phone call is not sufficient, and the MLO's belief that it was sufficient does not excuse the lender. Caleb asked for writing and did not receive it. By day 40 the lender was already late. The lender should send the written notice immediately, identify the specific reasons, and document the correction.
2. What records and HMDA issues does this file raise, and what should the lender do now?
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The file should contain the application date, credit and underwriting documentation, the adverse action notice, and evidence of when it was sent. Regulation B retention is generally 25 months for consumer loan files. If the loan is HMDA-reportable, the lender must record the application, action taken, reasons, and the applicant's ethnicity, race, and sex, and correct the loan/application register if it was not reported accurately. The lender should also review other files handled by this MLO to see whether verbal denials are a pattern. Corrective steps include sending the late notice, training the MLO and processors, updating the policy, and cooperating with the OFI inquiry. Retaliation against Caleb is prohibited.
3. The MLO told Caleb that paying off his truck 'would improve his chances.' Is that advice itself a violation?
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Not necessarily standing alone, but it creates risk. Telling an applicant how to improve a credit profile can be permissible if accurate and not misleading. The problem is that the MLO did not explain that the lender would need to re-pull credit and that paying off the truck would not guarantee approval. If the statement was used to discourage a timely adverse action notice or to avoid documenting the denial, it compounds the ECOA problem. The MLO should have documented the actual reasons for denial from the underwriting decision, not a casual suggestion. Compliance should review the statement for accuracy and ensure the borrower receives the written reasons he requested.