You've Been Declined For a Loan--Now What?

By Jill Terry

After filling out all the forms and waiting for what seemed to be an eternity, your application for credit has been declined. Do you have to accept the bad news and figure out another way to finance your dreams? Not if the bank made an error in reviewing your application--and banks do make errors.

Financial institutions must follow certain rules when they decline an applicant. By knowing the rules, you can challenge your bank's decision from a position of greater power.

Timing. How much time has passed between the time the bank had everything it needed to make a decision and the date it generated its notice of adverse action? If the lag was greater than 30 days, speak up and demand that you be able to apply again. (It's possible that your chances will be better the second time.)
Reasons. This is where many banks tend to err. Regulation B (the Federal Equal Credit Opportunity Act) requires that disclosed reasons be specific, which means that it is illegal to deny you credit for something that can't be quantified.

Valid (and commonly used) reasons for decline include:

High debt ratio
Delinquent credit (past or present)
No credit history
Public records like judgments or liens
Collection accounts

Invalid reasons include:

No phone listing for address.
Insufficient income (if there is no minimum income requirement for that particular type of credit).
Incomplete application (if the bank never gave you the opportunity to provide the missing information).
Any reference to the prohibited bases of race, color, religion, national origin, sex, marital status, age (provided the applicant is old enough to enter into a binding contract).
All or part of the applicant's income derives from any public assistance program.
The applicant has in good faith exercised any right under the Consumer Credit Protection Act.

So, what do you do if you've been declined in error? If your bank has not notified you in a timely manner or has used reasons that are not specific, you have two options. You can either challenge the bank directly or you can report the incident to the federal agency that serves as that bank's regulatory body. Fines and other punishments have been levied on banks for just these types of violations. If you're not sure which agency regulates your bank, check your decline letter--the information is supposed to be disclosed (it's usually at the bottom of the document they send you, often in small print).

If the reason for decline is just plain wrong and the bank obtained the information from a credit bureau, you'll need to contact the credit bureau to correct their data. The name and location of the credit bureau must also be disclosed to you if the bank relied on the information to reach its decision.

For more information on Regulation B, visit the Federal Reserve Bank's Web site. For a list of available consumer protection publications, visit The Federal Reserve's consumer information area.