Federal Reserve Issues Directive: Regulation B’s Adverse Action Notice Applies to Loan Mod Denials


In 1974, Congress decided that there was a need to make sure that the various financial institutions, and other firms engaged in the extension of credit, make such credit available with “fairness, impartiality, and without discrimination on the basis of sex or marital status”.

In response, Congress passed the Equal Credit Opportunity Act (“ECOA”).  When enacted in 1974, the ECOA prohibited discrimination on the basis of marital status and sex, but in 1976, it was amended to prohibit other bases of discrimination, including race and national origin.  Other amendments followed, and today, ECOA prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, because an applicant receives income from a public assistance program, or because an applicant has in good faith exercised any right under the Consumer Credit Protection Act.

Congress charged the Federal Reserve Board with interpreting the Federal Equal Credit Opportunity Act (ECOA), and Regulation B was promulgated by the Federal Reserve Board to implement ECOA.  As a result, the Federal Reserve Board’s interpretation of ECOA has the force of law.

Everyone still with me on this?  Don’t worry, it gets better from here.

This past week, the Treasury Department started sending out what it’s referring to as “Foreclosure SWAT Teams” into banks to take a closer look at their operations.  The Obama Administration says it’s cracking down on mortgage servicers that aren’t doing enough to stop foreclosures, which I suppose is one way to phrase what mortgage servicers are not doing.

Well, the SWAT team examiners apparently had quite a few questions, and some of those questions were about ECOA.  More specifically, the questions were about Reg B’s “adverse action notice requirements,” and whether they applied to borrowers applying for a loan modification.

In response, the Federal Reserve Board issued a directive to its examiners on December 4, stating that if you have an extension of credit on an application, then there is an obligation to provide an adverse action notice to the borrower who is declined for a loan modification.  That means that lenders or servicers have thirty days to provide a notice to homeowners, including up to four principal reasons for the decline.  The directive also states:

“We understand that Treasury has directed lenders and servicers… HAMP servicers to provide written notice to a borrower that has been evaluated for HAMP, but has not been offered a trial modification.”

Why is all of this important?  Well, it’s quite simple really.  The number of times a lender or servicer has complied with this requirement of Reg B, at least as far as I’ve seen or heard, is… hmmm… let’s say… infrequently.  And wouldn’t you know it, there’s a statutory fine for not complying with Reg B’s adverse action notice requirement: $10,000, plus attorneys fees.

Assuming you’re an attorney or a homeowner who has lost a home and didn’t receive a letter from your slender or serrvicer explaining why you were declined for a loan modification, within thirty days of being declined, I believe the correct response would be: “Woohoo!”

(If you have further questions, or want a copy of the directive, email me at mandelman@mac.com)

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