Consumer Compliance Outlook: Fourth Issue 2021

Advanced Topics in Adverse Action Notices Under the Equal Credit Opportunity Act

By Dolores Collazo, Senior Examiner, Federal Reserve Bank of Atlanta

The requirement that creditors give reasons for adverse action is …. a strong and necessary adjunct to the antidiscrimination purpose of the legislation, for only if creditors know they must explain their decisions will they effectively be discouraged from discriminatory practices. [R]ejected credit applicants will now be able to learn where and how their credit status is deficient and this information should have a pervasive and valuable educational benefit. Instead of being told only that they do not meet a particular creditor’s standards, consumers particularly should benefit from knowing, for example, that the reason for the denial is their short residence in the area, or their recent change of employment, or their already over-extended financial situation.

Legislative history of Equal Credit Opportunity Act Amendments of 19761

The Equal Credit Opportunity Act (ECOA), as implemented by Regulation B, requires creditors to notify businesses and consumers applying for credit about the action taken on their applications within specified time periods. If adverse action is taken, as defined in the ECOA and Regulation B, the creditor must provide an adverse action notice (AAN) disclosing the reasons for taking adverse action, and, if a credit score was used, the key factors adversely affecting the score. As the legislative history of the ECOA quoted at the beginning of this article indicates, these notices provide transparency to the credit underwriting process and help protect applicants against potential credit discrimination by requiring creditors to specify the reasons for taking adverse action. The Fair Credit Reporting Act (FCRA) also imposes AAN requirements in certain circumstances. Unlike the ECOA, however, the FCRA applies only to consumers and more broadly applies to adverse action on certain noncredit transactions such as employment or insurance applications.2 Outlook published an article in 2013 on these requirements titled “Adverse Action Notice Requirements Under the ECOA and the FCRA,” which is our most viewed article.3

In this follow-up article, we discuss advanced AAN requirements, including counteroffers, incomplete applications, and withdrawn applications. We also review the differences among an inquiry, prequalification, and preapproval as well as the notice requirements for each. In addition, we review the AAN requirements when multiple creditors are involved in a credit transaction. Finally, we discuss the emerging issue of the AAN considerations when a credit decision is based on innovative credit practices, such as credit models using alternative data sets, artificial intelligence (AI), or machine learning (ML). This article presumes the reader is familiar with our prior article, which defined adverse action and reviewed the general AAN requirements.


Situations can arise during the loan application process in which the creditor neither approves nor denies an application, including counteroffers and applications that are incomplete or withdrawn. We discuss the AAN requirements in these circumstances.


A counteroffer occurs when a creditor is willing to grant credit but on different terms than the applicant requested. For example, the creditor’s lending standards may require a higher down payment for a mortgage loan or a shorter repayment term for a used automobile loan than the applicant requested. The regulation imposes two notice requirements for counteroffers.4 First, the creditor must send a notice with the terms of the counteroffer within 30 days after receiving a completed application. Second, if the applicant does not expressly accept or use the credit offered within 90 days of the initial counteroffer notice, the creditor must send an AAN for the counteroffer. To reduce the compliance burden, a creditor can combine the AAN for the original application along with the counteroffer, provided the combined notice is sent within 30 days after receiving the completed application.5 If a creditor uses the combined notice, and the borrower does not respond within 90 days, the creditor is not required to send a second AAN.6 A sample of a combined counteroffer notice is provided in Appendix C7 to Regulation B. A sound practice is to specify a date on which the counteroffer expires; the regulation does not require a creditor to hold a counteroffer open for 90 days or any other particular time period.8

Compliance Tip Boxes

Counteroffer Compliance Tips

  • A counteroffer should not mistakenly be treated as an approval and an AAN must be provided, if applicable.
  • If a combined notice is not used, implement a control to ensure that an AAN is sent if the applicant does not accept the counteroffer within 90 days.

Incomplete Application

A creditor has latitude under the regulation to determine the type and amount of information it requires from applicants to complete a credit application9 and must act diligently to collect information needed to complete the application.10 When a creditor receives an application that lacks sufficient data for a credit decision (excluding a preapproval that qualifies as an application, which is discussed later in this article),11 the creditor has several options. First, a creditor may deny the application and provide an AAN specifying that an incomplete application is the reason for the denial.12 Second, a creditor may provide a notice of incompleteness, which must meet these requirements under §1002.9(c)(2):

Finally, a creditor may inform the applicant orally about providing any additional information to complete the application.13 If the applicant provides the requested information, the creditor must act in accordance with §1002.9(a) from the date of receiving the information. If the application remains incomplete after the oral notice, the creditor must either provide an AAN or a notice of incompleteness.14 Notices for incomplete applications must be provided within 30 days after receiving the application, unless notice is provided in accordance with §1002.9((c).

Responses to Notice of Incompleteness

Table 1 lists the compliance requirements when an applicant responds to a notice of incompleteness:

Table 1: Compliance Requirements for an Applicant’s Response to Notice of Incompleteness

Applicant’s Response Creditor’s Obligation
Applicant provides information within the designated time period The creditor must reevaluate the application and, if denied, provide an AAN within 30 days, including specific reasons for the action taken or disclose that the applicant has the right to request the reasons.15
Applicant provides information after the specified deadline The creditor may process the application or require that the applicant submit a new one.16
Applicant fails to respond to a notice of incompleteness within the specified time The compliance obligations for the notice of incompleteness are satisfied; however, the record retention requirements in 12 C.F.R. §1002.12(b)(1) still apply.

A sample of a combined notice of incompleteness is provided in Appendix C17 of Regulation B.

If an application is incomplete, but contains sufficient information to make a credit decision, and the creditor denies the application, the applicant must be advised about the specific reasons for the credit denial or notice of the right to receive the reasons. In this instance, missing information or incomplete application cannot be specified as the basis for the denial since the creditor had sufficient information to make a credit decision.18

Withdrawn Application

Section 1002.9 specifies the deadlines by which a creditor must notify a credit applicant of the action taken. But if the applicant expressly withdraws the application before the applicable deadline, the notice requirements do not apply.19 Finally, when a loan is approved where the parties contemplated that the applicant would inquire about its status, but fails to do so within 30 days of applying, the creditor may treat the application as withdrawn. No notice is required.20

Compliance Tip Boxes

Compliance Tip for Withdrawn Applications

If a creditor has obtained sufficient information to make a credit decision and denies the application, it should not be treated as withdrawn because the applicant did not inquire about the status of it. An AAN is required because the creditor denied the application.


A consumer may shop for credit, particularly for a larger credit transaction such as a residential mortgage loan. A consumer’s interactions with a creditor while shopping can result in inquiries, preapprovals, and prequalification requests, which are technical credit terms that have different compliance requirements. It is important to understand the AAN requirements when discussing loan products and credit qualifications with potential applicants to reduce the risk of violating Regulation B.


When shopping for a loan, consumers often contact creditors to inquire about loan products and terms. It is important to distinguish between an application, which triggers the regulation’s notice requirements, and an inquiry, which does not. The regulation defines application as “an oral or written request for an extension of credit that is made in accordance with the procedures established by a creditor for the type of credit requested.”21 The Official Staff Commentary (commentary) clarifies that procedures “refers to the actual practices followed by a creditor for making credit decisions as well as its stated application procedures. For example, if a creditor’s stated policy is to require all applications to be in writing on the creditor’s application form, but the creditor also makes credit decisions based on oral requests, the creditor’s procedures are to accept both oral and written applications.”22

The regulation states that how a creditor responds to the consumer, and not what the consumer says or asks, determines if an inquiry becomes an application and is subject to an AAN.23 While the regulation encourages creditors to provide consumers with information about loan terms, the commentary notes that, if a creditor, while answering a request, “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.”24

To further clarify this distinction, the commentary25 provides these examples of inquiries when a consumer calls or asks for the following:

Compliance Tip Boxes

Inquiry Compliance Tip

Sufficiently train staff to communicate with consumers about loan products to avoid the compliance risks associated with handling inquiries.


A prequalification refers to a request to determine if an applicant would likely qualify for credit if he applied. Like an inquiry, a prequalification request can evolve into an application that must comply with the notice requirements in §1002.9, depending on the creditor’s response to the request.26 For example, a consumer may want to know the mortgage amount he could qualify for when shopping for a home. Generally, an AAN is not applicable if the creditor responds by telling the consumer the loan amount, rate, and other terms of credit the consumer could qualify for under various loan programs and explains the process the consumer must follow to submit a mortgage application and the information the creditor will analyze in reaching a credit decision. On the other hand, a creditor has treated a request as an application subject to adverse action notification if, after evaluating information, the creditor decides it will not approve the request and communicates that decision to the consumer.27 For example, if the creditor tells the consumer that it cannot approve a mortgage application because the consumer has a bankruptcy in his credit history, the creditor has denied an application for credit.28


The regulation does not explicitly define preapproval. Instead, the commentary clarifies that the definition of application includes certain preapproval requests. It provides this example of a preapproval request that is deemed an application:

A person asks a financial institution to “preapprove” her for a loan (for example, to finance a house or a vehicle she plans to buy) and the institution reviews the request under a program in which the institution, after a comprehensive analysis of her creditworthiness, issues a written commitment valid for a designated period of time to extend a loan up to a specified amount. The written commitment may not be subject to conditions other than conditions that require the identification of adequate collateral, conditions that require no material change in the applicant's financial condition or creditworthiness prior to funding the loan, and limited conditions that are not related to the financial condition or creditworthiness of the applicant that the lender ordinarily attaches to a traditional application (such as certification of a clear termite inspection for a home purchase loan, or a maximum mileage requirement for a used car loan).29

Thus, if a consumer’s request to be preapproved for credit accords with this example, the request is deemed an application and the notice provisions of §1002.9 apply.30 The commentary also clarifies that if the creditor evaluates the applicant’s creditworthiness and determines he does not qualify for a preapproval, an AAN is required.31

Finally, if the creditor’s preapproval program does not provide written commitments, requests for preapprovals are treated as prequalification requests and are subject to the prequalification requirements discussed previously.32


Applicants sometimes use third parties to apply to multiple creditors. The AAN requirements in these circumstances are addressed in §1002.9(g):

When an application is made on behalf of an applicant to more than one creditor and the applicant expressly accepts or uses credit offered by one of the creditors, notifying the parties of any action taken by any of the other creditors is not required. If no credit is offered or if the applicant does not expressly accept or use the credit offered, each creditor taking adverse action must comply with this section, directly or through a third party. A third party’s notice will disclose the identity of each creditor on whose behalf the notice is given.

If adverse action is taken, the creditor or a noncreditor third party may provide the AAN.33 If a third party provides one notification on behalf of multiple creditors, the notice must contain the name and address of each creditor.34 The notice must either disclose the applicant’s right to receive a statement of the specific reasons within 30 days or provide the primary reasons that each creditor relied upon in taking the adverse action, clearly indicating which reasons relate to which creditor. If a single AAN is provided to an applicant on behalf of several creditors and they are under the jurisdiction of different federal enforcement agencies, the notice doesn’t need to name each agency; the disclosure of any of them is acceptable.35

For applications submitted through a third party, a creditor is not liable for an act or omission of the third party that constitutes a violation of the regulation if the creditor accurately and in a timely manner provided the third party with the information needed for the notification and maintains reasonable procedures adapted to prevent such violations.36

Compliance Tip Boxes

Third-Party Compliance Tip

Insufficient internal controls for monitoring third parties that are used for an AAN may elevate compliance risks.


Some creditors are using emerging technologies to evaluate credit applications, including alternative data sets, such as analyzing the cash flows in a consumer’s bank account, and artificial intelligence (AI)/machine learning (ML) algorithms.37 Because AANs must include a “statement of specific reasons” the adverse action was taken, these technologies can present challenges to creditors because the specific way in which they operate to inform credit decisions may be based on complex interrelationships. As discussed next, regulators have issued some guidance in this area.

Adverse Action Notification When Alternative Data Are Used

In December 2019, the banking agencies issued the Interagency Statement on the Use of Alternative Data in Credit Underwriting (interagency statement).38 The interagency statement noted that some creditors are using alternative data (defined as information not typically found in a consumer’s credit report file or that consumers customarily provide during applications for credit)39 to evaluate borrowers’ repayment ability, including bank account cash flows. The interagency statement noted the creditors’ use of cash flow data can generally be explained and disclosed to the applicant consistent with the AAN requirements in the ECOA and the FCRA.40

Appendix C of Regulation B includes sample AAN forms that list some of the factors creditors commonly consider in taking adverse action. However, when a creditor uses alternative data in the credit decision and the application is denied based on that data, the factors listed in the Appendix C forms may not be suitable. Appendix C states that if reasons commonly used by the creditor are not provided on the form, the creditor should modify the checklist by substituting or adding other reasons.41 This flexibility may be useful when applying the AAN requirements to denied applications that were based on alternative data.

Adverse Action Notification When AI/ML Models Are Used

According to research from the Consumer Financial Protection Bureau (Bureau), 26 million consumers (about one out of 10 adults in America) could be considered credit invisible because they do not have a credit record at the three national credit bureaus.42 The Bureau also noted that another 19 million consumers have too little information to be evaluated by a widely used credit scoring model.43 Underwriting models that use AI/ML technologies to automate credit decisioning may allow lenders to evaluate other information about credit applicants beyond traditional credit bureau report data.

However, the use of AI/ML technologies in credit decisions can pose similar challenges as alternative data in determining and disclosing in the AAN the specific reason(s) for taking adverse action. In the Bureau’s blog post titled “Innovation Spotlight: Providing Adverse Action Notices When Using AI/ML Models,” informal guidance is provided on this emerging issue.44 The Bureau noted that Regulation B provides flexibility that can be compatible with AI algorithms. For example, although a creditor must provide the specific reasons for an adverse action, the commentary clarifies that a creditor is not required to describe how or why a disclosed factor adversely affected an applicant, or for credit scoring systems, how the factor relates to creditworthiness.45 Thus, a creditor may disclose a reason for taking adverse action, even if the relationship between the factor and the credit decision may not be clear to the applicant. This flexibility may help creditors when issuing AANs based on AI models in which the variables and key reasons are known but may not be clear to the consumer.

The Bureau also noted that Regulation B does not mandate the use of any particular list of reasons. Instead, creditors must accurately describe the factors actually considered and scored by a creditor, even if those reasons are not reflected on the current sample forms.


In general, a creditor must preserve all written or recorded information for a credit application for 25 months (generally 12 months for business credit) after the date on which the creditor informed the applicant of the action taken on an application or of incompleteness.47 The 25-month retention rule also applies when a creditor offers credit to potential customers.48 For withdrawn applications, the financial institution must retain applications for 25 months from the date the applicant withdrew it.49


The Uniform Interagency Consumer Compliance Rating System50 (CC Rating System) notes that all institutions, regardless of size, should maintain an effective compliance management system (CMS) tailored to the size, complexity, and risk profile of the entity. Compliance officers can apply CMS elements to their adverse action notification activities to help ensure compliance. For example, ensure that the AAN rules are sufficiently explained in policies and procedures, provided in training materials for staff with related responsibilities, and included in compliance monitoring activities. As noted in the CC Rating System, strong compliance programs promote consumer protection by preventing, self-identifying, and addressing compliance issues in a proactive manner.


This follow-up article reviewed more advanced issues in complying with the ECOA’s AAN requirements, including the emerging issue of AANs when creditors use alternative data or AI/ML in credit decisions. Specific issues and questions should be raised with your primary regulator.

Tech Sprint on Electronic Disclosures of Adverse Action

In October 2020, the Consumer Financial Protection Bureau conducted a virtual conference ― Tech Sprint on Electronic Disclosures of Adverse Action46 ― to help improve consumer adverse action notices (AANs). Participant teams from diverse areas of the financial services industry were tasked with developing “innovative electronic ways to notify consumers of, and inform them about, adverse credit actions.”

The executive summary for the Tech Sprint noted participants suggested different proposals to improve the AAN process, which included providing additional information to applicants about actions they could undertake to increase the chances that their applications would be approved in the future. Other participants suggested alternative approaches to improve the format and presentation of the AAN to better engage with the applicant, such as using chatbots, customized videos, and links to useful consumer-facing resources.


1 See S. Rep. 94-589, at 4 (1976) (reprinted inthe 1976 U.S. Code Congressional and Administration News, pp. 403, 406).

2 See 15 U.S.C. §1681a(k)(1)(B).

3 See Sarah Ammermann, “Adverse Action Notice Requirements Under the ECOA and the FCRA,” Consumer Compliance Outlook (Second Quarter 2013).

4 See 12 C.F.R. §1002.9(a)(1)(i) and (iv).

5 See Comment 9(a)(1)-6.

6 See Comment 9(a)(1)-6.

7 Combined counteroffer notice is contained in Form C-4 of Appendix C to Regulation B.

8 See Comment 9(a)-4.

9 See Comment 2(f)-1.

10 See Comment 2(f)-6.

11 See Comment 9(c)(1)-1.

12 See 12 C.F.R. 1002(9)(c)(i).

13 See 12 C.F.R. 1002.9(c)(3).

14 See Comment 9(c)(3)-1.

15 See 12 C.F.R. §1002.9(c)(2).

16 See Comment 9(c)(2)-1.

17 Combined notice of incompleteness is contained in Form C-6 of Appendix C to Regulation B.

18 See Comment 9(a)(1)-4.

19 See Comment 9-2.

20 See 12 C.F.R. §1002.9(e).

21 See 12 C.F.R. §1002.2(f).

22 See Comment 2(f)-2.

23 See Comment 2(f)-3.

24 See Comment 2(f)-3.

25 See Comment 2(f)-4.

26 See Comments 2(f)-3, 9-5.

27 See Comment 9-5.

28 See Comment 9-5.

29 See Comment 2(f)-5.

30 See Comment 2(f)-5: Additional information is available in the Federal Register notice for the 2003 amendment to Regulation B adding the staff commentary on preapprovals. See 68 Federal Register 13144 (March 18, 2003).

31 See Comment 2(f)-5.ii.

32 See Comment 2(f)-5.

33 See Comment 9(g)-1.

34 See Comment 9(g)-1.

35 See Comment 9(g)-2.

36 See Comment 9(g)-3.

37 A full discussion of AI/ML is beyond the scope of this article. For additional information see the Bureau’s blog post “Innovation Spotlight: Providing Adverse Action Notices When Using AI/ML Models” (July 7, 2020) (Innovation Spotlight).

38 Interagency Statement on the Use of Alternative Data in Credit Underwriting” (December 12, 2019). The Federal Reserve Board discussed the statement for the institutions it supervises in Consumer Affairs letter 19-11.

39 See “Interagency Statement,” footnote 1.

40 SeeInteragency Statement,” p. 2.

41 See Appendix C, Instruction 3.

42 See “Credit Invisibles” (May 2015), p. 6.

43 See “Credit Invisibles,” p. 6.

44 See Innovation Spotlight; see footnote 36.

45 See Comments 9(b)(2)-3 and -4, respectively.

46 See Tech Sprint on Electronic Disclosures of Adverse Action Notices.

47 See 12 §1002.12(b).

48 See 12 C.F.R. §1002.12(7).

49 See Comment 12(b)(3)-1.

50 See CA letter 16-8, Uniform Interagency Consumer Compliance Rating System (November 22, 2016).