Would it be valid to deny someone credit if they have recently been released from prison, but they have a job and a strong co-signer? They would have the capacity to pay and credit is little to none due to the prison term, hence the reason for the co-signer. Policy states that an applicant may not have a co-signer or co-borrower if their credit history is poor, lacks the ability to repay, or is of poor character. Would the fact that he/she has been recently released from prison be considered poor character? Would it make any difference if the applicant was a repeat offendor? Has anyone else run into this type of a situation on loan applicants?

OK, I'll stick my neck out here. I see there have been 29 views of this message and no one wanted to opine on it.

Being a convict certainly goes to character. And you probably have a legitimate business reason to deny the credit based on a lack of credit history. The circumstances of this applicant would make it difficult for examiners to use this as a comparable for anything, so the fair lending risk to you is probably low if you do deny the loan, unless you happen to have a niche lending to ex-cons.

Having said all that, and unless this person perpetrated some really heinous crime, why wouldn't you make the loan? The applicant doesn't have a "poor" credit record. They have an ability to pay, backed up by what I hope is a solid co-signer. From a business standpoint, you may want to think twice before dismissing the applicant. Just a thought. AR.

Now that AR has the ball rolling let me play devil's advocate. But what if the lender just doesn't want to make the loan. Nothing in any regulations says I have to make a loan to anyone. If the banker decides they don't want to, what are they going to list as the reason for denial?

Why you are at it, think about this one. I once had a discussion with a banker in a small town (1100 people). An applicant came in and requested credit. The banker said that this man had offered his son drugs and did not want to make a loan to what he labeled "a known drug dealer". With hopes of finding another reason to deny the applicant, the loan officer pulled a credit report to find it perfect. The applicant also had an appropriate D/I ratio and down payment. What now? I say don't make the loan and list "undesirable character" as the reason for denial. This may/would open a huge can of worms though.

What are your thoughts?
BTW, I gave you 5 stars, AR.

Bottom line, IMHO, is that you use character as a lending factor. While you could look at all the factors, parole?, community service?, parole officer costs? etc. ex-cons are not a protected class.

BUT, do you think the loan would pay and the bank would profit? That is the key.

Modify your lending policy to say you don't lend to convicted felons. Use that as your stated reason to deny.
But then again, we live in a society where the crime is appropriately punished and we return that person back to normal society. Society has decided this person has received sufficient punishment and has made him one of us again. Seems to me you are adding more punishment on top of what society has already given him by denying him credit for no reason other than the fact "we" have previously punished him. That said, I wouldn't want to be known in town as the bank that gave the rapist the car loan. On the other hand, if the crime was something less, this guy will probably go on to become your Congressman or sheriff and you can say you helped him when he needed help!

These are all areas that have been discussed. As long as the co-signer would be on the loan, yes, the bank would probably profit from the loan. The concern I guess is if after a 6-12 months of payment history and the borrower would want to refinance the loan without a co-signer, there is concern of whether or not at that point it would be profitable due to possible re-entry into prison.

I love discussions like this. Some initial questions are asked, which are answered to the best of everyone's ability. Then we are given a seemingly small tidbit of other information that changes the entire scenario.

If the applicant is a repeat or chronic criminal, this certainly should be taken into account in the assessment of his character and in his ability to repay the loan. As I said originally, I think you have legitimate business reasons for denying the loan. Mr. Dickinson, however, raises a good point. Even without an objective reason to deny the loan, you may still do so. Just don't do so based on a prohibited basis. Convicts aren't a protected class.

Thanks for the stars, Mr. Dickinson. I haven't figured those out just yet. AR.

hey, maybe he doesn't have acceptable ID and could be denied based on not being acceptable to open an account under USA Patriot Act guidelines!!!!!!!!!

I think it would be worthwhile to consider the applicants offenses. Was he in prison for writing bad checks? Back child support? Scamming the elderly? I'd call all of these red flags- a credit report is not the only source of past financial history. On the other hand, if he was jailed for DUI, simple assault, petty theft, or drug posession, it gets to be more of a gray area.

Okay, we have decided to deny the application due to now having documentation that the applicant is a repeat offender. We intend on marking the "other" category on the adverse action notice, but the verbage to identify "other" is somewhat questionable. Is "poor character" enough to identify the "other" category or should it be more explicit? Any thoughts on how this should be handled would be appreciated.

In situations like this you might want to avail yourself of the AAN that does not contain the specific reasons for the denial Form C-5. If the applicant does not request the reasons then you don't have to open that can of worms.

Would it be permissible to state that you have reason to doubt that the applicant's stated income will not continue for the term of the loan?

Just another opinion, but we just went through a similar situation here. You don't want to put it in your loan policy that you will not lend to someone with a record because it could come back to haunt you later. For instance stay Mr. Jones the bank's largest depositor is hauled in for something. Now he wants a short term loan, but you have a policy and it would be hard for you to say that it is ok now when it wasn't before.

Another thing to consider and I am looking at discrimination again, but if this person is a minority you may want to be sure to think about treating this with caution. It is not prohibited to discriminate because of criminal history but I guarantee that if this person can claim that he is part of a protected class he will!

a possible cause for denial could be lack of continous employment? The person could be on job probation with his record?

I am not sure the lack of continuous employment will work. That is currently the reason there is a co-signer on the loan.

Good thought, Jennifer! The key to a valid discrimination claim in connection with the situation Jennifer describes would go back to an examiner/investigator being able to find a similarly situated non-minority ex-con that was granted credit by the bank. (Provided, of course, that the loan to the minority ex-con was denied because of the public record and not some other reason that might prove to be discriminatory.)

That is why you need to be very careful about putting something in your loan policy that would disqualify ex-convicts.

I have just discussed this issue with a well known compliance consulting firm and our regulatory agency and have decided to approach it in the described manner. The "other" box will be checked and verbage used will be: Mulitple Criminal Felony Rape Convictions. Documentation of the public information will be placed with the application for verification. This is the exact reason and verifies the poor character issue. Thanks for every one's input and thoughts.

Making decisions based on character is a slippery slope.

Who's next? Lawyers?

Remember that Bob Dole ran on the platform, "Character Matters". The electorate determined
that character was generally irrelevant.

When I first started in banking (shortly after the dinosaurs became extinct), the American Institute of Banking sponsored various types of banking courses. The "Intro to Lending" course's first chapter expounded upon the five Cs of lending, one of which is character.

Today I read on a non-banking site (on my lunch hour, by the way - no, really!) a fictitious obituary for Common Sense. I believe Common Sense's untimely death was opportunistically anticipated by those who issue regulations that deny everthing Common Sense stood for.

Complyguy-
Do you have a link? I would love to see that obit!

JacFSB - Sure thing, but I'll have to wait until my dinner break (no, really! - we work until 8:00 p.m. on Friday) to look it up.

Well, I'm here until 8:00 as well, so I understand where you are coming from.

The Death of Common Sense

www.gold-eagle.com/cgi-bin/gn/get/forum.html?date=2002%3A07%3A19%3A10%3A00%3A00%

Scroll down to the 10:07 a.m. post.

Oops! For some reason, this link takes you to the Aug. 5, 2001 forum. Select the July 19, 2002, 10:00 a.m. forum, then scroll down to the 10:07 post.

That's a keeper!