Can We Block Credit Applications from Consumers Who Were Denied Because of a Credit Freeze?

By Leslie Callaway, CRCM, CAFP, CAMS; Mark Kruhm, CRCM, CAFP; and Rhonda Castaneda, CRCM

Q.Executive management would like to institute a policy that if a credit card applicant is denied due to a credit freeze the applicant would be unable to ever reapply for credit with the bank. Can the bank do this?

A. No. The ability to place a credit freeze is a right granted to consumers under the FCRA, which is part of the Consumer Credit Protection Act.

Regulation B (Equal Credit Opportunity Act) prohibits discrimination on any prohibited basis, and §1002.2(z) includes in the definition of prohibited basis the fact that the applicant “has in good faith exercised any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Bureau.”

Thus, the bank may deny the application initially due to the freeze and allow the consumer to lift the freeze and re-apply. But if the bank denies someone credit because the consumer placed a freeze, and never allows the applicant to reapply, it has effectively violated Regulation B.

Q. My bank has a question related to employment rules under the Fair Credit Reporting Act. When denying an application for employment based on a consumer report, my bank provides an adverse action notice as the FCRA requires. Must that notice include information beyond the reasons for denial?

A. The reasons for denial are not required to be included in the adverse action notice. However, keep in mind that the use of either a consumer report from a consumer reporting agency or an investigative consumer report triggers multiple disclosure requirements under the FCRA. (§604(b))

Before rejecting a job application, denying a promotion or taking any other adverse employment action based on information in a consumer report, the bank must give the applicant or employee a copy of the applicant’s consumer report and a copy of A Summary of Your Rights Under the Fair Credit Reporting Act.

Once a derogatory decision is made, the bank must provide the final adverse action notice which includes: the name and contact information of the consumer reporting agency or third party that provided the consumer report or the background check; a statement that the consumer reporting agency did not make the adverse employment decision and therefore cannot provide any reasons for the adverse action; and notification that the applicant or employee is entitled to receive a free copy of the background check or consumer report on which the adverse action was based within a 60-day period.

Q. My question concerns the April 2021 amendment to the Ability-to-Repay/Qualified Mortgage rule under Regulation Z. The April final rule states that for applications received on or after March 1, 2021, but before the mandatory compliance date of Oct. 1, 2022, banks that choose to originate general QM loans have the option of complying with either the revised, price-based General QM loan definition or the original, total monthly-debt-to-total-monthly-income-based General QM loan definition. Must a bank choose which definition it uses and stick with just that one definition for all loan qualifications, or is a creditor free to use both definitions as it chooses to qualify a loan?

A. It appears that banks may make that decision on a loan-by-loan basis. New comment 1 to §1026.43(e)(2) clarifies this point and is summarized in the Supplementary Information to the April final rule:

Regarding the comment asking the Bureau to clarify that the original, DTI-based General QM loan definition and the revised, priced-based General QM loan definition are available on a loan-by-loan basis, the Bureau notes that, as new comment 43(e)(2)-1 states, both the original, DTI-based General QM loan definition and the revised, price-based General QM loan definition are available to creditors for transactions for which the creditor receives an application on or after March 1, 2021, but prior to October 1, 2022.

Q. My bank is implementing an employee benefit that offers a discounted interest rate or discounted fees on mortgage loans. May an employee deemed an insider under Regulation O (such as executive officers) participate in this program?

A. Yes. Section 215.4(a)(2)(i) of Regulation O (rule regarding loans to executive officers, directors, or principal shareholders) clarifies that the regulation does not prohibit loans that are “widely available to employees,” presuming it does not otherwise give preference to an insider. Note, however, that other provisions may still apply, such as the §215.5 restrictions on the loans amounts that executive officers may borrow.

Answers are provided by Leslie Callaway, CRCM, CAFP, CAMS, senior director of compliance outreach and development; Mark Kruhm, CRCM, CAFP, senior compliance analyst; and Rhonda Castaneda, CRCM, senior compliance analyst, ABA Regulatory Policy and Compliance. Answers do not provide, nor are they intended to substitute for, professional legal advice. All answers for this column were provided in July 2021 and were current as of that date.