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What are the required disclosures when a bank declines a loan based on an inadequate property appraisal?

My bank is seeking assistance with required disclosures under the Fair Credit Reporting Act (FCRA) when the bank declines a loan based solely on an inadequate property appraisal. Some individuals at our bank are arguing that the FCRA adverse action disclosure is required if the bank denies a loan due to a low appraisal (third party) value being too low or a major defect in the subject property. Do you agree?

No. Adverse action is not necessary because an appraisal is not a consumer report: the appraiser is not a consumer-reporting agency and the information does not reflect on the creditworthiness of the applicant.

Section 615 (a) of FCRA requires users of consumer reports to provide an adverse action notice if the creditor uses the report as the basis for adverse action.

Section 603(d) defines "consumer report" as any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer's eligibility for credit, insurance, employment, or other permitted purpose. The appraisal report is not a consumer report because it does not reflect on the listed attributes (credit worthiness etc.).

Section 615(b)(1) of the FCRA also requires an adverse action notice "whenever credit for personal, family, or household purposes...is denied…because of information obtained from a person other than a consumer reporting agency bearing upon a consumer's credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.” To qualify, the information must bear on at least one of the seven characteristics listed in this definition.

That the property does not appraise high enough to make the loan has nothing to do with the consumer’s character, credit standing, mode of living, etc.. Thus, it is not necessary to provide the FCRA information (the name, address, and telephone number of the consumer reporting agency etc.) on the adverse action notice. Of course, the bank would list the inadequate appraisal as a reason for denial for Regulation B (Equal Credit Opportunity Act) purposes. In addition, even when the bank declines the loan, the bank must provide the borrower with a copy of the appraisal in accordance with Section 1002.14 of Regulation B. (June 2019)

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