Are You Handling Adverse Action Notices Correctly? Two Common Mistakes to Avoid

If you’re in mortgage lending, you’ve likely heard this before: documentation matters. But according to the Federal Reserve’s latest Compliance Outlook webinar I attended, lenders are still getting flagged for the same two issues when it comes to adverse action.

Both involve clear rules under Regulation B, and both can be easily overlooked in day-to-day operations. And both can lead to violations if not handled correctly.

Here’s a deeper look at what examiners are seeing and what your team should be doing differently.

1. A Conversation Log Is Not a Notice of Incompleteness

Regulation B requires formal written notices for incomplete applications. If you need more information to make a credit decision, the request must be made in writing and follow a specific format.

What the Regulation Requires:

• The request must identify the missing items.

• It must set a clear deadline for the applicant to respond.

• It must inform the applicant that the application will not proceed unless the required information is provided.

Anything less is not compliant.

Common Violation:

Loan officers may document missing items in the loan system or mention them in casual emails—but that’s not enough. Unless the request is sent as a formal Notice of Incompleteness, the file cannot be marked as “canceled for incompleteness.”

Examiners also flagged another issue: some lenders send out template Notices of Incompleteness at the time of initial disclosures, listing only standard outstanding items. These notices often fail to identify the specific documents missing from that particular borrower’s file. In those cases, examiners determined the notices did not meet the requirements of Regulation B.

If the lender fails to send a proper Notice of Incompleteness and the applicant does not respond, the lender must issue a denial under Regulation B, rather than simply canceling the file.

Why It Matters:

Without proper documentation, a lender may appear to have failed to follow required procedures, or worse, taken inconsistent actions with borrowers, which raises fair lending concerns.

What Examiners Expect:

• Written notices sent within 30 days of receiving the incomplete application

• Evidence that the borrower received and understood the notice

• Documentation of how and when the notice was delivered

Sound Practices:

• Use standardized templates for Notices of Incompleteness

• Train staff to avoid informal communication for missing items

• Track deadlines and responses through your LOS or compliance system

• Set up a compliance review process for any files marked “incomplete”

2. If You Say “You Don’t Qualify,” You May Owe an Adverse Action Notice

Even an inquiry can become an application if the loan officer evaluates the applicant’s information and issues a denial—even informally.

What Triggers an Application:

According to Regulation B, if you:

• Collect enough information to evaluate creditworthiness

• Decide that the applicant doesn’t qualify

• Communicate that decision to the consumer

… you’ve just treated the inquiry as an application. And that means you owe the borrower a formal Notice of Adverse Action, including the reason for the denial.

Common Violation:

Let’s say a prospect asks about qualifying for a loan. The loan officer pulls credit, sees a bankruptcy, and says, “Unfortunately, we wouldn’t be able to approve that.” Even if the person never completed a full application, that still counts as a credit decision. A denial notice is now required.

Why It Matters:

Failing to issue a Notice of Adverse Action may appear to indicate that the lender is hiding the reasons for denial or not treating consumers consistently. This can result in findings tied to discrimination risk or FCRA noncompliance.

What Examiners Expect:

• A clear distinction between inquiries, prequalifications, and applications

• Notices are sent to the consumer whenever a decision is communicated

• Proper tracking of when informal denials occur—and whether notices are followed

Sound Practices:

• Train loan officers to handle prequalifications and interest rate inquiries carefully

• Avoid communicating denial decisions outside of formal channels

• Document all consumer interactions that lead to a declined outcome

• Use systems that trigger compliance workflows when credit is pulled

A Quick Comparison

Issue	Common Violation	What’s Required	What to Do
Notice of Incompleteness	Request made via email or notes	Formal written notice with missing items, deadline, and next steps	Use standardized letters that clearly list the borrower’s specific missing items and track delivery
Inquiry becomes Application	The loan officer says “you don’t qualify” during prequal	That’s now a denial, requiring a Notice of Adverse Action	Train staff to flag when evaluations cross the line into decisions

Final Reminder: Informal ≠ Compliant

In both cases, the issue comes down to informality.

• Informal document requests don’t meet Regulation B standards.

• Informal denials—even well-meaning ones—still trigger compliance obligations.

These may seem like minor missteps, but regulators are watching closely, especially in fair lending reviews. Take time now to tighten your procedures and reinforce training. That way, your documentation tells the same story your policies do.

Compliance Isn’t Just About Checking Boxes—It’s About Protecting Your Business

Missed notices. Informal denials. These are small details that create significant risks, especially during a review or exam.

If you’re rethinking your internal controls, now’s the time to bring in a team that understands both the rules and how to apply them in real-life mortgage workflows.

Loan Risk Advisors helps mortgage lenders:

• Strengthen policies and procedures

• Review adverse action workflows

• Train loan officers on Reg B and FCRA triggers

• Build systems that support consistent, compliant communication

We know every mortgage operation runs a little differently, and aligning compliance with day-to-day business needs is an ongoing challenge.

Take a moment to review your current process. If you’re unsure how your practices hold up under these requirements, talk with your compliance professional—and if you don’t have one, call Loan Risk Advisors.

Book a free discovery call to take the first step.