Managing CIP Without Discrimination
In the world of compliance, we sometimes face requirements that appear contradictory, what we like to call dueling regulations. The information prohibitions of Regulation B sometimes seem to contradict the information gathering requirements of the Bank Secrecy Act and the Customer Identification Program. Or is it the other way around? It's difficult to tell when the regulations don't show us the way.
We are doing business in an era that is vastly different from the times when the Equal Credit Opportunity Act and the Fair Housing Act were brought into being. In the 1970s when Regulation B was first written (and rewritten) the approach to discrimination was "don't ask and don't tell." What lenders did not know about a customer could not be used to discriminate against that customer. During this period of civil rights actions, information about race and ethnicity was quashed and pictures were removed from files to prevent use in discrimination.
Things changed a bit when we needed to measure actions in the context of fair treatment or discrimination. With fair lending assessment in mind, we cautiously began collecting information that had been prohibited so that the patterns of lending and other decisions could be measured and monitored. Thus, we have the information rules in Regulation B that prohibit asking about race, ethnicity and gender except for certain types of loans. And we also have restrictions on when and how those otherwise illegal questions may be asked and answered.
With the increasing role of financial institutions in monitoring the financial aspects of money laundering and terrorism finance, financial institutions are required to know as much about customers and potential customers as possible. However, they must do this without violating Regulation B or the Fair Housing Act - or any other civil rights of the consumer.
How, exactly, do we identify a customer as required by the Bank Secrecy Act without violating any civil rights of the customer or committing a technical violation of Regulation B? The solution lies in the questions we ask and the order in which we ask them.
The Question Test
Before asking applicants a question, think about two things. First, is this a question that you would ask of every customer? Second, think about the possible answers to your questions and what information they might reveal.
The classic example of a question that might be tempting to ask but would not be asked of every customer is "are you planning to have children?" And there are worse versions of this question, including "when is the baby due?" Since the lender would not ask this question of a male customer, it is not a legal one.
In today's world, there is a new type of troubling question - dealing with nationality or citizenship. What ECOA and other civil rights laws prohibit is asking only certain customers - such as those with accents or interesting clothing. "What country are you from?" may be an interesting question to generate conversation but it may also reveal race, ethnicity, religion or other prohibited information. Moreover, the very fact that you are tempted to ask the question indicates that you think this customer is somehow different and that raises questions of equal or different treatment.
Complying with Regulation B's information restrictions often depends on the order in which you compile information. To arrive at information about gender, race, ethnicity or other prohibitions in a legal way, we have to take the correct path. Just as commercial lenders must first establish the ownership of the borrowing entity and what is needed to secure the loan before asking about the spouse's participation, the consumer lender must follow a sequence to obtain information about the customer legally.
Because of CIP, we must ask customers certain questions to establish their identity and to assess the risk they present. But we must do this without discrimination. So we start with the standard questions that are allowed under Regulation B. When it comes to identification, a concern is the citizenship status of the potential customer. We don't, however, jump to the conclusion that a consumer with an accent is not a US citizen. Instead, "are you a US citizen" is the starting point. If the consumer says "yes," that is the end of further questions and "what country are you really from" is an illegal question. However, if the customer says "no," you are now cleared to ask for information that verifies their citizenship of another country.
Resolution to the conflict between CIP and ECOA lies in finding the right balance. First we learn what we need to know (and may legally ask) from a consumer in order to make a sound underwriting decision. Next, we also need to compile enough information to be certain that we are dealing with an honest customer and not someone planning to use the institution for illegal purposes such as money laundering or terrorism financing. So we start with the standard questions we learn from Regulation B. It is only when the answers to those questions raise concerns or more questions that we probe further. And if we are tempted to ask additional questions, we must always ask ourselves whether our concerns have a factual foundation and are not merely a substitute for some form of prejudice.
- Select a sample of files to review for equal treatment and illegal questions. Structure the sample using the LAR and the names of applicants.
- Review training materials on fair lending and ECOA and determine whether lending staff is getting adequate training on asking sensitive questions.
- If you have the time, find a discrete place in a branch and observe how staff treats customers and how customers react.
- Review consumer complaints to find any concerns expressed about discrimination or unfair treatment based on nationality. If you find problems, take action.
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 5, 4/05
First published on 04/01/2005