Source: https://www.rskcompliance.com/2017/05/
Timestamp: 2019-04-24 13:48:34+00:00

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The Bank denied a request for a residential mortgage loan based on an insufficient down payment. Although it ran a credit report on the applicant, the credit score was not a factor in its decision. On the adverse action form, there is a box indicating that the information from a consumer credit report played a part in its decision. As the applicant’s credit score did not have an impact on the decision, is the Bank required to check the box and provide the other required information regarding the credit report?
The Bank is required to disclose the credit score on the adverse action notice if it was a factor in the credit decision, even if it was an insignificant one. Having a credit report on file which provides a credit score implies that the credit score affected the credit decision. Federal examiners are known to adopt this approach. The Bank must make a business decision as to whether it should address that possibility by disclosing the credit score and related information. If the Bank determines that the credit score played no role in the credit decision, it should document such finding in a memorandum for the file.
A statement that the consumer reporting agency did not make the credit decision and is unable to provide to the consumer the specific reasons why the adverse action was taken.
The numerical credit score, if it was a factor in the adverse action taken by the creditor. 15 USC §1681m(a).
When the final rule regarding credit report disclosures in the adverse action notice was published, the official commentary acknowledged that, in some cases, a creditor required to provide an adverse action notice under FCRA may have used a consumer report, but not the credit score provided by it. The commentary notes that under section 1100F of the Dodd-Frank Act, a creditor is not required to disclose a credit score if it played no role in the credit decision. However, if a credit score was even an insignificant factor in that decision, then it must be disclosed. Federal Register, vol. 76 41590, 41592.
In this case, if the Bank did not use a credit score in making its credit decision, the disclosure of the score on the adverse action notice would be contrary to what it actually did. As a practical matter, however, it is difficult for a creditor to have a consumer report on file which discloses a credit score, yet maintain that the score played no part in its credit decision. This implication that the score influenced the credit decision is especially true if the creditor has minimum credit score requirements for its loans. Federal examiners are known to take this position and require the credit report information to be disclosed.
On the other hand, disclosing the credit score in the adverse action notice even though it was not used might imply that there is something wrong with the score.
The Bank will have to make a business decision as to whether the credit score and related information should be disclosed. If the Bank determines that the credit score played no role in its decision and should not be disclosed, it should document that finding in a memorandum for the file.
The Bank has a borrower who will be buying a lot and building two dwellings on it. He will live in one dwelling and sell the other. Is the Bank required to make consumer disclosures for the loan?
Whether the TRID rules apply to the loan will depend on whether it is considered to be a closed-end consumer loan. This will in turn require the Bank to determine whether it is primarily for a business or consumer purpose. To do so, the Bank will apply such factors as the relationship of the construction and sale of a dwelling to the borrower’s primary occupation or its sale to his income. In the event that a question remains as to whether the loan is for a consumer or business purpose, the Bank can make the TRID disclosures without affecting the determination as to whether the loan was exempt from Regulation Z.
The TILA-RESPA Integrated Disclosure (“TRID”) rules apply to closed-end consumer loans secured by real property, including construction loans. 12 CFR §1026.19(e)(1)(i). Whether the TRID rules apply to the proposed loan will depend on whether or not it is being made for a consumer purpose.
Regulation Z defines a consumer credit as credit offered primarily for personal, family, or household purposes. The official commentary states that there is no precise test for what constitutes credit offered or extended for such purposes, or what constitutes the primary purpose. It refers to its discussion concerning business purpose for guidance in making such a determination. 12 CFR §1026.2(a)(12).
The relationship of the borrower’s primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.
The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.
Basically, the greater the ratio of income generated by the acquisition to the total income of the borrower, the larger the transaction, or the closer the relationship of the acquisition to the borrower’s primary occupation, the more likely it is that the credit is being used for a business purpose. The purpose stated by the borrower is also to be considered. Official Interpretations, §1026.2(a)(12) – 1, 3(a) – 3.
In this case, the borrower will be building two dwellings, occupying one as his residence and selling the other. If only the construction of the residence was considered, the loan would certainly be for a consumer purpose. In considering that the loan will also be used for the construction of a dwelling to be sold, the Bank will have to apply such factors as its relationship to the borrower’s primary occupation or its sale to his income. If the borrower’s primary occupation is not related to the construction and sale of residential properties and this transaction is in the nature of a “one off” to help finance the construction of his residence, then it should be considered a consumer loan, for which the appropriate TRID disclosures must be provided.
Regulation Z also takes into consideration whether a loan secured by owner-occupied residential rental property may be for a business purpose. If credit is extended to acquire, improve, or maintain rental property that will be owner-occupied, it will be deemed to be for a business purpose if it was used to acquire a property having more than two housing units, or if it was for the improvement or maintenance of a property containing more than four units. Official Interpretations, §1026.3(a) – 5.
Such rules will not apply in this matter, of course, since the other dwelling will be sold, not rented. Nevertheless, they provide the Bank with insight into whether a loan such as the one proposed will be considered to be for a business purpose.
If a question exists regarding the primary purpose of a credit extension, the official commentary states that a creditor is free to make Truth-in-Lending disclosures, and the fact that disclosures are made under such circumstances does not determine whether the transaction was exempt. Official Interpretations, §1026.3(a) – 1.
The Bank will have to make a business decision, given the penalties provided by Regulation Z for failing to provide disclosures concerning the loan or closing costs when they are required.

References: §1681
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