You have a right to reasons when a bank refuses you a loan, and no right at all when it refuses you an account

A reader wrote in July to say her bank denied my business account application, in those words, and asked how to appeal it. I told her to write and demand the specific reasons, because she had a right to them. She does not have that right. I was wrong, and it was bad advice given in 2 lines, because the right I had in mind belongs to a different product and I had repeated it for 3 years without once checking which product it attaches to.

The rule that gives an applicant reasons is about credit. Section 1002.2 of title 12 defines credit as “the right granted by a creditor to an applicant to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment therefor”. A checking account is none of those things. You are the one lending money here, not the bank.

I went looking for the boundary properly after that exchange, 6 weeks ago. I read 2 sets of rules side by side, the notification rules in title 12 and the confidentiality rules in title 31, and it changed what I tell people to do first. What follows is what the bank owes you, what it is forbidden to tell you, and the 4 things worth fixing before the next application.

What you are owed for a loan and not for an account

For business credit the machinery is specific and it lives in 12 CFR 1002.9. A creditor notifies the applicant of the action taken within 30 days of receiving a completed application. The notice either states the specific reasons, or tells the applicant about the right to get them within 30 days “if the statement is requested within 60 days of the creditor's notification”.

The size of the business changes the shape of it. The modified rules apply to a business “that had gross revenues of $1 million or less in its preceding fiscal year”. Above that, the creditor notifies “within a reasonable time, orally or in writing” and provides written reasons only if asked in writing within 60 days.

None of that reaches a deposit account. There is no equivalent notice, no clock, and no right to a statement of reasons. The bank can decline the application and say nothing, and that is not a loophole, it is the perimeter of the rule.

The 2 clocks, side by side

The gap is not a drafting oversight. The rules about reasons grew out of lending, where a refusal is a judgement about a person and the risk of an unfair judgement is the whole point. A deposit account is a different transaction: the customer hands money to the bank, and the bank decides whether it wants the relationship.

Knowing that changes what is worth spending an afternoon on. Arguing about your right to an explanation is spending it on a right you do not have. Assembling a better file is spending it on the only thing you control.

Sometimes the silence is required

This is the part I had never understood in 6 years of answering this question, and it changed how I read the whole situation. There is a category of refusal where the bank is legally forbidden to explain itself, and the prohibition is written in plain words.

Section 1020.320 of title 31 says a suspicious activity report, “and any information that would reveal the existence of a SAR, are confidential and shall not be disclosed”. It goes further and names the people: “No bank, and no director, officer, employee, or agent of any bank, shall disclose a SAR or any information that would reveal the existence of a SAR.”

So the friendly manager who says only that the application did not meet internal criteria may not be hiding behind a phrase. He may be following a rule that would put his employer in a bad place if he said anything else. I had read that as a brush-off for years.

The timing explains the delays that people find sinister. A report is filed “no later than 30 calendar days after the date of initial detection”, with another 30 days available to identify a suspect, and never more than 60 in total. A file that goes quiet for a month is not always a file that has been forgotten.

What actually turns up in a refused file

I cannot see inside any bank's decision and I am not going to pretend I can. What follows is a pattern across roughly 12 files. What I can report is the pattern in the files I have been shown afterwards, which is a biased sample of the ones people were willing to show me.

The most common single item is a document mismatch. A name spelled 2 ways, an address that appears on 1 document and nowhere else, a formation date that disagrees with the tax identification letter. None of those things is suspicious on its own. All of it costs the officer time, and time is the one thing the officer has none of, which is why a file that would survive an hour of attention can fail 10 minutes of it.

The second is a business description that could mean anything. The words are consulting, trading, general services. Those words appear in nearly every file that gets a second look, and they appear because founders write them to keep options open rather than to describe what happens on a Tuesday.

The third is a structure with more layers than revenue. A company owned by a company owned by a person, all incorporated within 5 weeks of each other, with no operating history under any of them. There is nothing wrong with that structure at all. It costs more to verify than the account earns the bank in year 1, and I think that arithmetic is the real decision in most of these cases.

The fourth reason is not about the file at all, and it is the one that makes founders doubt themselves for months. Some banks stop opening accounts in a category for a quarter, quietly, and nobody applying that month will ever learn that this was the reason. I have no way to verify how often that happens in a given quarter. I mention it because founders otherwise conclude that something is wrong with them.

The 4 things worth fixing before you apply again

Start with the ownership documentation, which is where I have seen most refusals actually originate. Under 31 CFR 1010.230 the bank has to collect the beneficial owners of a legal entity customer, meaning anybody holding 25 per cent or more, plus 1 person who controls the company. A structure the officer cannot resolve in 20 minutes is a structure that gets declined. A holding company owning a holding company, with a trust somewhere in the middle, is not suspicious. It is expensive to verify, and the cost falls on somebody who has a queue.

Then make every name match. The name on the formation certificate, the tax identification letter, the lease and the sign on the door should be one string, or the differences should live documented in the same folder as everything else, because a mismatch that takes a founder 10 seconds to explain takes an officer 40 minutes to prove. Mismatched names cost nothing to fix in advance. They are the cheapest reason to decline and the easiest to remove.

Then write 3 sentences about what the business does, in words a person outside your industry will recognise, and put them on page 1 where the officer will see them. Vague activity descriptions attract questions and specific ones close them, which is the whole of that paragraph, and it is the cheapest 20 minutes of preparation available to anybody about to hand a folder across a desk to somebody who has 40 more folders behind it.

Then apply somewhere else at the same time. I now give this advice first. For years I gave it last. A refusal is a decision about the fit between your file and one bank's risk appetite, and risk appetite is not uniform. A community bank, a credit union and a national bank read the same file 3 different ways.

Whatever you do, do not open a personal account and run the business through it. That solves the week and creates the year, because it mixes the money the corporate structure exists to separate, and every future application will ask why the business has no banking history.

We are describing published rules rather than giving advice, and a compliance officer or your lawyer is the person to ask about a specific refusal. This is a subject where the general answer and the answer about your company can differ a lot.

What to ask for instead of reasons

Since the reasons are not owed, ask for something that is available. Ask whether the application can be reconsidered with additional documentation, and offer the documents. That question is about the future rather than about the decision, and it is one an officer can answer without touching anything confidential.

Ask which 2 or 3 documents would have helped. That is forward looking again, and answerable again. I have seen that question produce a useful list twice in 4 attempts. I have never once seen a demand for reasons produce anything at all.

And keep your own record of the refusal, with the date and the name of the person. The record is not for complaining. To answer the question the next bank will ask about your banking history, which comes up more often than the refusal itself.

A short digression about the word denied

Banks rarely use it. The letter says the application cannot be progressed at this time, or that the bank is unable to proceed, and the softness reads as evasion to somebody who has just been turned down. Some of it is legal caution and some is simple habit. I find the vagueness harder to read past than a plain no would be, and a plain no is not available to them for the reasons above. Anyway, back to the file.

What I could not establish

How often business account applications are refused. The banking agencies publish deposit volumes and complaint counts. I have not found a published refusal rate for business deposit accounts anywhere, in 2 evenings of looking. Business accounts sit outside the perimeter of most consumer rules, so nobody is required to count this, and what nobody counts nobody publishes.

Whether a second application to the same bank does better after a gap. My guess is that it depends on what changed in the file rather than on the 90 days that passed. I have not tested it and I do not know of anybody who has. I asked 2 people who have been through it and got 2 different stories.

The detail I keep thinking about is that the silence and the right sit 1 desk apart. The same institution, on the same day, owes a written explanation for a 20,000 dollar loan and owes nothing at all for a checking account, and in some cases is forbidden from explaining the second one. Nobody among the 3 people I asked will say how many refusals fall into the forbidden category rather than the ordinary one, and I suspect nobody publishes that number because nobody is required to produce it, which is the trouble with a question that sits outside every reporting perimeter at once.