We closed on a mortgage loan refinancing on July 1, and the borrower asked us to lower the interest rate on July 5. We refused, and the borrower is threatening to rescind the transaction on the last day of the right of rescission period — July 6. If the borrower reapplies for the refinancing after rescinding, can we reject the customer’s application?

Yes, we believe that you may reject the customer’s application, which will require you to provide an appropriate adverse action notice.

Regulation B does not prohibit a creditor from rejecting an applicant due to the applicant’s previous exercise of the right of rescission. Regulation B permits creditors to consider “any information obtained” in connection with an application, provided that the information is not used to discriminate on a prohibited basis. As the U.S. District Court for the Northern District of Illinois has noted, the Equal Credit Opportunity Act and Regulation B “do not prohibit adverse action for any reason that is not discriminatory.”

If you do reject the customer’s application, you must provide an adverse action noting the reason for the rejection or disclosing the applicant’s right to request a statement of your reasons. In addition, the Fair Credit Reporting Act requires that the adverse action notice disclose that you obtained information “from a person other than a consumer reporting agency bearing upon the consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living,” and that the applicant may request the information that you relied on in taking the adverse action within sixty days of receipt of the adverse action notice.

For resources related to our guidance, please see:

Regulation B, 12 CFR 1002.6(a) (“Except as otherwise provided in the Act and this part, a creditor may consider any information obtained, so long as the information is not used to discriminate against an applicant on a prohibited basis. . . .”)

Grant v. World Class Mortg. Corp., 1990 WL 19466 at *2 (N.D. Ill. 1990) (“The statute and regulations do not prohibit adverse action for any reason that is not discriminatory as defined by the statute (see 15 USCA § 1691(a), (b), (c) (1982)), do not require that adverse action be based upon reliable information, and do not require reconsideration of an application when it turns out that adverse action has been taken upon unreliable information. The statute and regulations only required that defendant give plaintiffs a statement of the reasons for the adverse action. 15 USCA § 1691(d)(2)(A) (1982); 12 CFR §§ 202.9(a)(2)(i), (b)(2) (1989).”)

Regulation B, 12 CFR 1002.9(a)(2) (Among other items, an adverse action notice must include “either: (i) A statement of specific reasons for the action taken; or (ii) A disclosure of the applicant’s right to a statement of specific reasons within 30 days, if the statement is requested within 60 days of the creditor’s notification. The disclosure shall include the name, address, and telephone number of the person or office from which the statement of reasons can be obtained. If the creditor chooses to provide the reasons orally, the creditor shall also disclose the applicant’s right to have them confirmed in writing within 30 days of receiving the applicant’s written request for confirmation.”)

Fair Credit Reporting Act, 15 USC 1681m(b)(1) (“Whenever credit for personal, family, or household purposes involving a consumer is denied or the charge for such credit is increased either wholly or partly because of information obtained from a person other than a consumer reporting agency bearing upon the consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living, the user of such information shall, within a reasonable period of time, upon the consumer’s written request for the reasons for such adverse action received within sixty days after learning of such adverse action, disclose the nature of the information to the consumer. The user of such information shall clearly and accurately disclose to the consumer his right to make such written request at the time such adverse action is communicated to the consumer.”)