IBA Compliance Connection

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We have a referral relationship with a leasing company for agricultural and commercial leases of equipment. The leasing company sends out an application on behalf of the applicant to multiple banks and will not fund a lease unless it has lined up a purchaser. The leasing company takes the application and then provides us with basic financial information about a potential lease to purchase, but we underwrite the lease ourselves as we would with any commercial credit application. We often ask the leasing company to obtain and send us more information from their applicant. We set the terms of the lease that will be acceptable to us, including the duration, the interest rate, and the down payment. When we decline to purchase a lease, do we need to send an adverse action notice to the leasing company, the commercial applicant, both or neither?

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As a creditor subject to Regulation B, your bank may fulfill its adverse action notice responsibilities either by sending the notices directly to the applicants or through the leasing company.

Regulation B generally requires “creditors” to provide an adverse action notice to applicants whenever an adverse action is taken with respect to a credit application. A “creditor” “includes all persons participating in the credit decision,” and “[t]his may include an assignee or a potential purchaser of the obligation who influences the credit decision by indicating whether or not it will purchase the obligation if the transaction is consummated.” In this case, your bank evaluates the applicant’s information, sets the terms of the lease, and indicates whether or not it will purchase the lease. Consequently, under this scenario your bank is a creditor subject to Regulation B’s adverse action notice requirements. And since applications are being made to more than one creditor by a third party (the leasing company) on behalf of applicants, Regulation B permits your bank to provide the adverse action notices either directly to the customers who are denied credit or through the leasing company that submitted the applications.

Note that in these third-party situations, an adverse action notice is required only when an applicant does not accept or use credit from any of the potential creditors contacted by the third party. However, if the third party (the leasing company) provides the adverse action notice, it must disclose the identity of each creditor on whose behalf the notice is given. 

For resources related to our guidance, please see:

  • Regulation B, 12 CFR 1002.9 (“A creditor shall notify an applicant of action taken within: (i) 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer to, or adverse action on the application . . . .”)

  • Regulation B, 12 CFR 1002.2(l) (“Creditor means a person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit. The term creditor includes a creditor’s assignee, transferee, or subrogee who so participates.”)

  • Official Interpretations, 12 CFR 1002, Paragraph 2(l), Comment 1 (“The term creditor includes all persons participating in the credit decision. This may include an assignee or a potential purchaser of the obligation who influences the credit decision by indicating whether or not it will purchase the obligation if the transaction is consummated.”)

  • Regulation B, 12 CFR 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, notification of 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 notice given by a third party shall disclose the identity of each creditor on whose behalf the notice is given.”)