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FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management

A bank denies a consumer a personal loan based on an automated credit score. Under adverse action requirements commonly applied to retail lending, what must the bank do?

The bank must give the applicant the principal, specific reasons for denial that reflect the factors actually driving the decision. A vague statement is inadequate, full model details are not required, and the duty applies to every applicant rather than only protected classes.

  1. AProvide the principal reasons for the denial, drawn from the factors that actually drove the decisionCorrect
  2. BDisclose the full scorecard coefficients and cutoff score to the applicant
  3. CProvide only a general statement that the application did not meet credit standards
  4. DProvide reasons only if the applicant is in a protected class

Explanation

Adverse action rules require specific principal reasons reflecting the factors that actually affected the decision, so applicants can understand and correct issues. Generic statements are insufficient, and full model disclosure is not required. The requirement applies to all applicants, not just protected classes.

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