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Does the bank need to send a declination for a car loan even if the bank does not accept the collateral offered?

We received a complaint from the mother of one of our customers. She said her daughter came in to apply for a loan secured by a car that had been wrecked. The purpose of the loan was to renovate the car, so it could be titled. The loan officer told her that the bank did not make auto loans secured by cars without a title. The loan officer suggested either a personal loan or home equity line, but the customer declined to apply. The loan officer did not provide an adverse action notice. Should he have sent a declination for the car loan even if the bank does not accept the collateral offered?

It appears that the loan officer should have provided an adverse action notice.

First, Comment 1 to §1002.2(c)(2)(v) of Regulation B (Equal Credit Opportunity Act) provides that notice is required “[w]hen an applicant applies for credit and the creditor does not offer the credit terms requested by the applicant (for example, the interest rate, length of maturity, collateral, or amount of downpayment.” This contrasts with §1002.2(c)(2)(v) which provides that a “refusal to extend credit because the creditor does not offer the type of credit or credit plan requested” is not an adverse action. In this case, it appears the bank offered the type of credit requested, but not the term requested related to collateral.

Second, when the loan officer declined the request, he had an application.

See the Comment 3 to §1002.2(f) of Regulation B:

When an inquiry or prequalification request becomes an application. A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the notification requirements under §1002.9. Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks.

That being said, if the consumer applied orally and the bank only accepts written applications, it would not have to provide an adverse action as explained in Comment 2 to §2002.2(f). (July 2018)

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