What to Do When You’ve Reviewed and Rejected a Request For Open Account Terms, by Michael C. Dennis

Let’s assume you have received and reviewed and rejected a request for open account terms from an applicant company. What would you do if that applicant called and demanded to know the specific reason for your decision? Would you:

  • Ignore the request, or
  • Might you offer a response such as this: “Your company does not meet our credit granting criteria”, or
  • Would you provide a more detailed explanation (and if so what information would you provide)

I think the answer is in part an internal policy issue, and in part a legal question based on relevant federal and state laws. I assume each of us has a process for handling this question from an angry applicant. I would be interested to know your process and your rationale for it.

This topic will be covered at the upcoming CreditScape Fall Summit, September 17-18 at the Tropicana in Las Vegas. For more information about the conference, visit www.creditscapeconference.com. I hope to see you there.

Michael C. Dennis is the author of the Encyclopedia of Credit, a free, fast, internet resource for credit and collection professionals. He is a frequent instructor at CMA-sponsored educational events. His most recent book, “Happy Customers, Faster Cash,” is available at amazon.com. He can be contacted at 408-204-0129.

One Reply to “What to Do When You’ve Reviewed and Rejected a Request For Open Account Terms, by Michael C. Dennis”

  1. Michael,

    Our written policy which I hope is still accurate. Your comments are welcomed as always.

    Under the Federal Trade Commission’s interpretation of the Equal Credit Opportunity Act, …. is required to provide written notice of credit denial if an application was in writing.

    If credit is denied, …. standard generic form can be used. If a request for explanation is submitted in writing, a formal written response is mandatory. The Credit Department has a more detailed form to satisfy this requirement.

    If the account requests a reason for the credit denial, … has an alternative form with specific bullet points. This must be prepared and forwarded within 30 days of the request. Note that the request must be made within 60 days of the “Adverse Action” (denial).

    Statutorily, …. has 30 days to advise a potential creditor that he is being denied credit.

    …. must retain all information used in making a credit denial decision for a minimum of one year.

    Internal Notes to Staff:

    Under the Federal Trade Commission’s interpretation of the Equal Credit Opportunity Act, we are required to provide written notice of credit denial.

    If credit is denied, the first form can be used if you feel a courtesy rejection is appropriate (but it is not mandatory) or if requested in writing (mandatory).

    The second form is to be used if the account requests a reason for the credit denial. This must be prepared and forwarded within 30 days of the request. Note that the request must be made within 60 days of the “Adverse Action” (denial).

    Technically, we have 30 days to advise a potential creditor that he is being denied credit.

    We must retain all information used in making a credit denial decision for a minimum of one year.

    Note: Courts have ruled that a rejection of an application for credit coupled with a counter-offer that is accepted does not constitute an Adverse Action and is therefore not subject to ECOA Notice requirements.

    Our standard form:

    Attn:

    RE: Denial of Credit

    Thank you for completing and forwarding your application to us for unsecured credit.

    Unfortunately, we are unable to extend credit to your firm at this time. The information we have obtained does not satisfy our requirements for establishing an open account relationship with you.

    If you will submit additional references and/or financial information, including your most recent Balance Sheet and Income Statement, we will gladly review these documents as they will impact our decision. Any adverse decision is based on facts we have currently on hand. These facts may change from time to time. You are welcome to re-apply whenever you believe there has been a change in your company’s condition that might alter our decision. In the meantime, we are fully prepared to service your account on a Cash In Advance (CIA) basis.

    If you desire some detail on why open credit terms were denied, please submit a written request to the undersigned within 60 days of the date on this letter at our corporate address. We will provide a statement of reasons within 30 days of receipt of your request.

    Please note that we comply with the requirements of the Equal Credit Opportunity Act (ECOA) as noted on the …. Application for Credit and Sales Agreement.

    Attn:

    RE: Statement of Credit Denial

    Pursuant to your request for reason(s) why your request for unsecured credit was denied, please review the checked points below and/or any comments:

    ____ Application For Credit and Sales Agreement incomplete
    ____ Application For Credit and Sales Agreement unsigned
    ____ Insufficient credit references
    ____ Insufficient number of credit reference responses
    ____ Banking institution provided did not respond
    ____ Excessive obligations
    ____ Inadequate assets
    ____ Lack of or scarcity of credit information
    ____ Delinquent credit obligations
    ____ Garnishments, attachments, foreclosures, repossessions, liens, or suits
    ____ Bankruptcy
    ____ Independent Credit Reports did not match expectations given sale conditions
    ____ Our inability/unwillingness to grant credit on the terms and conditions you request
    ____ Risk exposure versus profitability
    ____ Other. __________________________________________________________

    __________________________________________________________

    Please note that we comply with the requirements of the Equal Credit Opportunity Act (ECOA) as noted on the …. Application for Credit and Sales Agreement.

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