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Mortgage loan borrowers sometimes call asking if our bank will lower the rate via a modification agreement rather than a refinancing. If such a request is not approved, is our bank required to send an adverse action notice?

Mortgage loan borrowers sometimes call asking if our bank will lower the rate via a modification agreement rather than a refinancing, which can be expensive. Modification agreements involve only a limited review — review of a current credit report and past performance on the existing loan, as well as verification of employment. If such a request is not approved, is our bank required to send an adverse action notice?

It appears based on the facts presented, that both Regulation B (Equal Credit Opportunity act) and FCRA adverse actions would be required.

The Federal Reserve’s Consumer Affairs letter CA 09-13 addressing Mortgage Loan Modifications and Regulation B’s Adverse Action Requirement offers guidance.

It provides a four-part analysis. The creditor must determine whether there is: (1) an extension of credit; 2) an application, based on the creditor’s application process; (3) an “adverse action” on the application; and (4) an exemption from the adverse action requirement because the borrower is currently delinquent or in default.

In the fact pattern submitted: (1) the mortgage is an extension of credit; (2) the borrower has submitted the information the bank requires for a modification and thus meets the application requirement; (3) the borrower is being denied the modification, which is an adverse action; and (4) the borrow is not in default or delinquent. Thus, a Regulation B adverse action notice is required.

Similarly, if the reason(s) for denial are based on information from the credit report, an FCRA adverse action notice is required. (October 2019)

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