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Does Regulation B require a bank to provide an adverse action notice when the bank decides to close an account due to a system-generated Bank Secrecy Act alert?

Does Regulation B (Equal Credit Opportunity Act) require a bank to provide an adverse action notice when the bank decides to close an account due to a system-generated Bank Secrecy Act (BSA) alert? Would this fall under the exception to Regulation B’s definition of adverse action (§1002.2(c)(2)(iv)) that excludes "a refusal to extend credit because applicable law prohibits the creditor from extending the credit requested..."?

Yes, it appears that an adverse action notice is required in this scenario. If a bank closes an account, the bank must notify the customer that the account has been closed. What the bank provides as a reason is up to the bank: it just must be specific and truthful. However, the bank needs to be careful in what it discloses to the customer due to the Suspicious Activity Report (SAR) confidentiality rules. When explaining why the account is closed, the bank cannot indicate anything that would suggest that a SAR has been or will be filed.

The section you quoted goes more to a situation where the request for credit is made by someone with whom the bank cannot establish an account, a minor, for example, or a person on the OFAC list. Note, too, that this section applies to “a request” for credit— this customer already has an account and the bank is terminating it. The applicable section is section §1002.2(c) (1) (ii), which defines adverse action as “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….” (August 2018)

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