In addition to the well-publicized amendments which relate to collection of monitoring information for self-testing purposes and implementation of a record retention requirement on prescreenings, numerous other changes are being made to Regulation B and its official staff commentary. The final rule. The changes became effective on April 15, 2003, but compliance is not mandatory until April 15, 2004. Plus, comments made in the prefatory materials included with the final amendments provide additional insight into the FRB's view of the regulation's provisions. Here is a quick recap of the changes:
Determining if you have a joint application. New guidance is given for determining whether or not you have received a joint application. This is important because if the applicant intends to apply individually, you cannot require the signature of any other party. If there are truly joint applicants, however, then both parties should sign the promissory note. Violations in the business credit context are not uncommon. Keep in mind:
You must document a person's intent to become jointly liable for a credit obligation;
Evidence of that intent must be provided at the time of application;
You are not required to have a written application (except in instances where some other law, such as Reg B's Section 202.13 would require it), but a written application can certainly help establish who the applicants are;
The fact that two parties signed the note cannot be used as evidence of intent to be jointly liable at the time of application;
The revised commentary says that creditors have the flexibility to determine the methods used to establish intent to apply for joint credit;
Mere submission of joint financial information does not constitute evidence of intent to apply for joint credit;
Just because the applicant jointly owns property with someone else and submits information about the property and the joint owner to establish creditworthiness does not necessarily mean the joint owner intends to be a co-applicant on the loan.
Adverse Action. It is not considered adverse action if a creditor terminates or makes an unfavorable change to the terms of an account if that action affects "all or substantially all of a class of the creditor's accounts," so long as the action is not based on the individual credit characteristics of the affected accountholders. For example, if you decide to quit offering secured credit accounts, so you terminate those accounts, that would not be adverse action, and therefore no adverse action notice would be required. On the other hand, if you decide to stop offering something like a secured credit account and you move some of the secured credit customers to some other type of card program, but terminate others that don't qualify for your other card programs, you have differentiated between customers based upon their individual credit characteristics and those whose accounts are terminated would need to receive an adverse action notice.
Certain preapprovals as applications. The official staff commentary clarifies that certain preapprovals will be deemed to be "applications" under Regulation B. A request for a preapproved loan will be considered an application if it is done under procedures in which a creditor issues creditworthy persons a written commitment to extend credit up to a designated amount that is valid for a particular period of time, even if it is subject to conditions (such as identifying the property and having it appraise for a particular amount, or requiring no material changes in the financial condition of the applicant).
If the customer merely obtains a preapproval that does not entail a written commitment, that type of preapproval will not be considered an application. It will merely be treated as a prequalification.
If you do the types of preapprovals that involve written commitments, you need to treat them as applications and observe the timing requirements for action that are tied to applications.
Creditor. Certain obligations are placed on those who meet the definition of creditor. The amended rule defines the term to include one who "regularly participates in a credit decision, including setting the terms of credit." It includes l) those who make the decision to deny or extend credit; and 2) those who negotiate and set the terms of the credit with the consumer. In an indirect lending situation, however, it does NOT include a potential assignee that simply establishes underwriting guidelines or terms of general applicability for credit extensions it may acquire.
Detailing the reasons for adverse action. Whether you decide to deny credit based upon the creditworthiness of the applicant, joint applicant, or guarantor, you must have specific reasons. Since the purpose of the disclosure is to inform and educate applicants, co-applicants, or guarantors about why the denial is taking place. Don't be concerned about privacy issues when you are giving the primary applicant information about reasons for adverse action that may relate to a co-applicant or guarantor. The FRB says they should have an expectation that such information will be shared.
Notices and disclosures. The revisions require that Reg B written notices and other disclosures be l) provided in a clear and conspicuous manner; and 2) provided in a form an applicant may retain. If a Reg B disclosure or notice is not required to be in writing, however, it does not have to be given in a form the applicant may keep.
Certain types of disclosures that must be given on or with an application (such as the disclosure about why monitoring information is being sought, or the disclosure that an applicant need not necessarily list income from sources like alimony) are exempt from the retainability requirement. If the FRB had decided otherwise, creditors would have had to provide an extra copy of the application to applicants. They decided not to require such action.
Self-testing. Thinking about engaging in self-testing for ECOA violations? If you plan to collect monitoring information on nonmortgage loans in order to facilitate the self-testing, in addition to using the new model form to disclose to the applicant why the information is being requested, how it will be used, that completion of the section is mandatory, and that if they don't complete it you will be required to do so based upon visual observation and surname in a face-to-face meeting, you will need a written plan that describes, at a minimum:
the purpose of the self-test;
the methodology to be used;
the geographic area covered by the test;
the types of credit transactions involved;
the identity of the entity that will conduct the test and anlyze the data;
the timing of the test.
You may use a self-test to look at differential treatment in the application stage, underwriting phase, and in the terms and conditions of loan agreements, in addition to looking at disparities in review or collection procedures that might be based upon prohibited factors.
Monitoring information collected in connection with a self-test:
may only be used and evaluated by those conducting the self-test;
may not be used in a credit decision;
may not be used or evaluated by persons involved in a credit transaction, except in connection with taking any necessary corrective action.
If the self-test reveals that it is "more likely than not" that a violation has occurred, you must take corrective action that is timely and appropriate. What is appropriate will depend upon the particular facts and circumstances. It may include correcting policies or procedures that have contributed to the possible violation, improving audit and oversight systems, conducting additional training, or adopting new policies.
Immigration status and permanent residency. The revised rule clarifies that inquiries about permanent residence and immigration status may be made of not only an applicant, but also any other person in connection with a credit transaction.
Marital status discrimination. A creditor is not allowed to evaluate married and unmarried applicants under different standards, except as permitted or required by law, such as under certain state property laws. If you aggregate the incomes of married co-applicants, you must also aggregate the incomes of unmarried co-applicants.
Revision of ethnicity information. In order to conform to a U.S. Office of Management and Budget directive, the ethnicity portion of the monitoring information is being changed, but lenders can continue to use the current Appendix B model application form (which is issued by Fannie Mae and Freddie Mac and is in the process of being revised) until the FRB publishes a new form that reflects the new ethnicity and racial designations.
In the revised form, 1) there will be five racial designations; 2) the option to designate "Other" will be eliminated; and 3) respondents must be offered the option of selecting more than one racial designation. The five designations are as follows:
American Indian or Alaska Native;
Asian;
Black or African American;
Native Hawaiian or Other Pacific Islander; and
White.
Model Application Forms. They are making technical revisions to the introductory paragraphs in the model application forms in Appendix B and replacing "Residential Loan Application" with an updated "Uniform Residential Loan Application" (Freddie Mac 65/Fannie Mae 1003). There are also revisions to the first four model forms to clarify the guidance on how to evidence the intent of applicants to apply jointly for credit.
Prequalifications and Credit Reports. If you tell a consumer the maximum amount they may borrow under various loan programs, as well as the rates and terms available, that still does not turn the prequalification into an application for credit. Since a prequalification request doesn't rise to the level of an application, however, you do not have a permissible purpose to request a credit report. In those instances, if you wish to pull a credit report on the consumer, you will need to secure the consumer's permission.
Applications submitted through a third party. If applications are submitted through a third party, the address of each creditor must be included on the adverse action notice to give the applicant the information necessary to request information about the reasons for the adverse action.
The original version appeared in the January/February 2003 edition of the Oklahoma Bankers Association Compliance Informer.
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