#2141437 - 08/09/17 08:40 PM
Re: Loan Denial Reason
Anonymous
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10K Club
Joined: Nov 2000
Posts: 18,765
Central City, NE
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David, i just don't think everyone agrees on what is "prudent and ethical behavior". Is being a bartender at a strip joint "unethical"....but being a bartender at the local watering hole "ethical"? As Truffle already stated, my point is not to inject my (or your) definition of prudent and ethical behavior". The point is that NO REGULATION prohibits you from denying anyone for anything, unless it is illegal discrimination. Yes, it may be "unfair" to deny someone, but the lender has that right. It's not a right to demand a loan. Don't all denied applicants believe it was unfair?
If my LTV or DTI is too high for your bank, is that "unfair"? Sure, from my perspective. But it's prudent that you don't make me a loan AND YOU get to decide what level the LTV and DTI can be to be acceptable or unacceptable. Is that unfair? Is that a UDAP issue?
As I said earlier, you can deny people because they are ugly. Unfair? Sure! Illegal? No. This isn't a UDAP or UDAAP issue and it's not a a Reg B, HMDA or FHA issue. That's my point.
I'm not trying to pick a fight. I'm trying to say "don't make up rules that don't exist."
What's crazy to me is that anyone would say this is unfair. Saying I must accept/tolerate everyone and everything they do is an unfair policy, in my opinion. I'm also trying to bring to light what many Board and Sr. Mgt have discussed with me: the "push" to make people loans because of the regulatory pressure.
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#2141492 - 08/10/17 01:31 PM
Re: Loan Denial Reason
Anonymous
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10K Club
Joined: Nov 2000
Posts: 18,765
Central City, NE
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And no one is saying you must accept/tolerate everyone and everything they do.........but short of someone getting their income from an illegal source, why would you care where it came from? What is unfair about telling a bank "you are not the morality or ethics police....your job is to make good loans"? I work with primarily small banks. Many are the only bank in town or one of 2 or 3 in a small town. The reason these towns are still around is because the local bank pumps the economy - helping small businesses, advising businesses owners, etc. (CRA at it's best). Most of the owners/Presidents of these banks are THE economic development center of the community. They often make loans to risky small business owners that aren't prudent, but they know it will help the community. Similarly, if they make loans to "unethical" businesses, they can get great backlash from the community. You might say "That's a Privacy issue. No one should know where the business got their loan". If the business owner would tell someone, there's PR issues for the bank. Or Board members may put pressure on the bank not to allow these businesses. You can stick your head in the sand and say "that isn't right", but it's reality. Also, these owners/Presidents feel an obligation to keep their community "healthy" and may not want those types of businesses in their town. Whether the business can repay the loan is not a factor. Character still matters.
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#2141510 - 08/10/17 02:16 PM
Re: Loan Denial Reason
swiggles
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Joined: Jul 2003
Posts: 17,410
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Sure examiners can twist it. They twist things every day. But unless they can support their twist with regulations and laws, they can't even slap you on the wrist. We can debate all day if a certain lending criteria meets each of our individual ethical and moral guidelines but it won't get us to any conclusion. We've gone off on a tangent that isn't anywhere near the question the OP asked. The poor guy just wanted a suggestion on what denial code to use. For myself, I apologize that I cannot give you a clear answer, OP. Looking at this I'm inclined to go with 'unacceptable type of credit references provided'. Document the file to the nth degree and be ready to have someone explain it to the borrower. Good luck!
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#2141536 - 08/10/17 03:12 PM
Re: Loan Denial Reason
Anonymous
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10K Club
Joined: Oct 2000
Posts: 10,203
Toano, VA
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Sorry I'm joining this party late (but I have a good excuse!)
This has been a lively discussion of a topic that rarely boils down to a simple Y/N answer. Nevertheless, the answers to the OP's two questions are NO and NO--"income derived from prohibited industry" is insufficient.
Section 1002.9(b)(2) is clear: "Statements that the adverse action was based on the creditor's internal standards or policies...are insufficient." This section comes up more often in the context of credit scoring...where it is unquestionably insufficient to take adverse action and list as the reason "credit score too low." The same principle applies here.
Yes, you can base credit decisions on scores, and yes David is right to say that Reg. B doesn't force you to make any particular loan, and yes RR Becca is spot-on to advise "...if you are too embarrassed to type "because you work at a strip club" on the NOAA as the reason for denial, when that is in fact the reason for denial, you might want to rethink why you are denying the loan."
Like AANs for low-score denials, decisions based on internal policy require you to disclose the elements of the policy that most contributed (the "more than 4" standard is as reasonable here as in low-score denials) to the adverse decision. The institution's biggest challenge is to craft a policy that has bright line tests. Although the regulation doesn't say it in so many words, the overarching goal of the AAN process is to educate consumers who can then take steps to improve their qualifications and eventually obtain credit.
The OP stated that his/her institution has a policy. It had better be in writing if lenders need to cite it as a reason for AA. Also, it can't be mushy--it will need to include a list of the industries that are "prohibited". Since we're talking about company policy, then the list must be approved by the BOD--not the lenders. If the BOD can't agree that the stockholders' interest is best served by refusing loans based on occupations or industries that offends the sensibilities of some element of the local community, then management and lenders are placing their company at risk if they decide to impose some arbitrary standard.
Banks should exercise extreme caution if they insist on blacklisting certain industries or occupations. Listen to Ken: "...whenever a credit decision is made on a an illogical basis, the door is opened to the possibility that it was made on a prohibited basis."
In order for a policy to be fair and effective, it must be applied equally, That means all credit applicants must be asked to identify the industry with sufficient clarity for the lenders to apply the disqualification policy. Obviously, this won't be as easy as "are you under 18 or over 18?" and other pre-screening questions.
By this point (if you didn't already bail out of this post) you've probably decided that occupation/industry prescreening is more trouble than it's worth. I'll leave the light on for you.
_________________________
...gone fishing.
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