Loan Denial Reason

Bank has policy to not lend to "prohibited industries". They had a loan request from a manager of one of these industries and because his income is derived from his employment there, the bank decided to deny the loan. Not sure best way to list the reason on the adverse action notice. I know we shouldn't refer to loan policy, but can they say "income derived from prohibited industry"? Would that be specific enough? Thank you.

What do you mean by "prohibited industry"?

One bank had listed some ventures that they did not want to lend to, many of them in the "manual labor" pool. Better to phrase as new/unproven businesses than e.g. lawn maintenance. Many protected classes operate those businesses, and naming them could be disparate impact.

If you mean robocalling, pornography, etc., it might be a different reason.

And how would a consumer understand 'income derived from a prohibited industry'? And, like Rocky asked, what is a prohibited industry?

And....what is it about the "prohibited industry" that makes the loan risky?

This particular business that the manager works at is an adult entertainment business. The loan policy provides that a "prohibited" loan and industry is one that carries a higher degree of credit or reputational risk to the bank.

Follow up to my response - if the bank cannot use the policy as a reason for denial; just trying to think of an appropriate way to describe the reason why the bank won't make the loan.

By "adult" do you mean illegal or legal business?

As others said, I doubt the consumer would understand "prohibited industry", specifically if the industry they work in is legal.

The guy as an individual wanted a loan....or the company (the adult entertainment company) wanted a loan? Just asking as i feel like there ought to be a distinction between them.....a guy's income is his income....he isn't getting it from an illegal industry. Now, if your bank doesn't want to make loans to the actual adult entertainment company, to me that is entirely different.

Just saw Darth's response....to clarify, i *assume* by "adult entertainment" you meant one operating legally. If it's illegal, then yeah, that's a whole different thing.

This quote of yours is what i was getting it i suppose......i understand the reputational risk you are talking about IF you are talking about a loan made to the adult entertainment business. But denying someone who is applying individually for a loan because they are employed by that (legal) adult entertainment business....i mean....that just seems totally different to me, and a possible can of worms that could lead you down lots of twisty roads.

That was my hang-up too. There should be a differentiation between where someone works, and what their job is. If he was the owner, or if it were the business itself, it would be different. Assuming the business is legal, there could be a complaint filed.

I've seen restrictions before, but only for the business or owner, not their employees. [Would the Budweiser driver be banned because he supplies beer to adult entertainment business and/or bars?]

To synthesize your responses: If the "industry" is prohibited by law; e.g. marijuana cultivation and sale, there is some logic to your position. If the industry is prohibited because some people in your bank don't like it; .e.g. she's a stripper, denying her loan may ultimately make her one of your largest shareholders because, if there's any justice in the world, she's going to sue your socks off.

Thank you for the input. The business operates legally. The loan policy provides an extension of credit to any borrower within these industries is prohibited. That would mean a loan to the business or anyone involved with the business would be declined. I also had the concern about the manager and thought if it was a loan to the business, I could see that. But as the employee's income is from this business, the bank declined the loan.

I feel you could easily be open to a regulatory complaint.
If there is a review, and most of the workers are women, there could easily be a disparate impact complaint by the regulators against the bank.

Like Ken mentioned above they could "sue your socks off".

I'm going to play devil's advocate on this:
Reg B does not require us to make a loan to anyone. It only prohibits ILLEGAL discrimination based on a protected class. I think I can say I won't make loans to tattoo parlors, strippers, etc.

§1002.1(b):
The purpose of this part is to promote the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract); to the fact that all or part of the applicant's income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The regulation prohibits creditor practices that discriminate on the basis of any of these factors.

Strippers are not a protected class.

David, I agree with you on the wording of the regulation. Attitudes change however, and the regulation has been up to enhanced interpretation from many angles.

A few years ago, lenders were passing on the cost of credit reports to consumers. Credit reports for married applicants were usually joint, while unmarried (joint) applicants had to have separate reports, which cost slightly more. Despite common sense, regulators were challenging banks that unmarried joint applicants were being "disadvantaged as it cost them more to apply for credit". ($2 x $10 vs. $18 for a joint report). I had been working with creditors that were threatened with CMP's for passing on their additional $2 credit report costs to applicants.

I was indicating, it could be a disparate impact issue, although the manager was male, the issue could be gender bias based on disparate impact. It is defined as [from the OCC Fair Lending Exam Manual]:
"When a bank applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a “disparate impact. The fact that a policy or practice creates a disparity on a prohibited basis is not by itself proof of a violation. When the OCC finds that a bank’s policy or practice has a disparate impact, the OCC seeks to determine whether the policy or practice is justified by “business necessity.” The justification must be manifest and may not be hypothetical or speculative. Factors that may be relevant to the justification could include cost and profitability. Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by business necessity, it still may be found to be in violation if an alternative policy or practice could serve the same purpose with less discriminatory effect.

Disparate impact has been referred to more commonly by the OCC as “disproportionate adverse impact.” It is also referred to as the 'effects test.' ”

One bank I was working with had exam issues as prohibited business included lawn care. Examiners pointed out that Hispanics and Blacks made up a significantly higher percentage of lawn care businesses and had the bank identify why it was a "business necessity" to exclude those types of businesses. [The lender changed the policy to require a "seasoned business".]

Classifying businesses and owners is one thing, but people who work there could become a disparate impact issue to examiners, especially if there are complaints. The manager was denied and a guy, therefore chances more remote that it could be an issue (although, when using the term "protected class" I was told by an examiner to identify which class was not protected - he was right. )

Any industry that has a concentration of protected class applicants could be the poster child for the effects test. I was thinking not of the manager, but of potentially more females working in that particular industry then men. If denials were based on the business rather than the person, it could [triggered by complaints which is made easier by the CFPB] result in a closer scrutiny by examiners. "We're sorry, but you were denied because you are a server in a prohibited business. Become a server at McDonald's instead and we'll make you the loan." Again, this is a personal feeling, discriminating against a server, cook, cashier, cleaning person solely because of where they work. They are doing nothing illegal.

Again, the regulation has not changed - the interpretation and perceptions significantly have. David, you are right, as long as a creditor is not using one of the prohibited basis, it should not matter. I'm looking at other complications, including the possible negative press for not making the loan.

Hmmm, I've never thought the devil needed an advocate.

My example, a woman, would open the door to discrimination based on gender. If she were a member of a racial minority, that's a convenient double tap. My point is that 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. The beauty of Reg B is that, unlike most regulations, it has a basis in common sense; i.e. if all evidence indicates the person is going to pay you back why on earth would you care about their gender, ethnicity, etc.

I would imagine a lot of our male officers would be willing to visit the business weekly just to keep tabs on the business

Logic in a nutshell.

Good feedback. My point is that Reg B doesn't require you to make a loan to anyone. It only requires you not illegal discriminate. Disparate impact is certainly an issue to consider. I certainly understand Rocky's point, but the credit report costs is very clear. I think Reg B is clear that you don't have to make a loan to anyone you don't want to - as long as you don't illegal discriminate.

You shouldn't care about gender, ethnicity, etc., but you can certainly care about ethics. I wouldn't want to make a loan to someone selling illegal drugs - no matter what their gender, race, sex. That's an extreme example, but the point is the same.

I've had many lenders / owners of banks discuss "unethical businesses" issue with me. It's not my ethics - it's theirs. The strip club & exotic dancers are the most common examples, but sometimes owners of banks don't want to promote tattoo parlors or other businesses they feel crosses their ethical boundary. Again, my ethics don't matter. Why should a banker have to make a loan to an entity/person that crosses their ethical boundary? It's not based on race/sex/ethnicity/etc.

I'm simply pointing out Reg B doesn't require a lender to make a loan to anyone. It only prohibits illegal (protected class) discrimination.

What about UDAAP?
Unfair, Deceptive or Abusive Acts & Practices

Certainly sounds like an Unfair Practice to me. And we all know how subjective UDAAP claims can be.

UDAAP - really? Wow! I'm not trying to tell you how to run your bank. I'm trying to tell you there's no regulation that requires you to make anyone a loan. Why is that so hard to swallow?

Answer: The "pucker" factor is taking things to a new extreme. Some of you are so worried about someone telling you that people have a right to a loan. No they don't. You can deny someone because they are ugly or you don't like their clothing. (those aren't protected classes). If you attend any kind of lender underwriting training, you'll learn about the "5 C's". Character is (and always has been) the largest factor. How do you document character? Many lenders will tell you they have a "gut feeling" that something just isn't right. But I'm sure some of you would say "you have to make the loan."

Here's how far this has gone:
I was conducting fair lending a few months ago at a large bank (one of the top 5 in the U.S.). I talked about age and mentioned you can discriminate because someone is too young (under 18) or too old (a 90 year old asking for a 30 year mortgage). I had a lady argue with me that this was illegal. READ THE REG. They are both given as examples of what you CAN do.

Then I mentioned asking all applicants if they expected any interruptions in their income. I gave an example of a couple who said they were expecting a child. This lady blew up and said I was unethical and shouted "you can't ask people that question". They I finished my example by saying the husband was going to quit his job to stay home to raise the child. That's necessary information for an underwriter and not illegal.

She wrote on her feedback form that I was "an embarrassment to our industry and unethical". Everyone else laughed at her, but she represents some examiners and compliance officers that make up rules.

It's a sad day when fear overrules prudent and ethical behavior.

Not only does fear overrule prudent and ethical behavior, business advancement as well.

In a former life, compliance told mortgage they were absolutely not legally allowed to send rate sheets to local real estate agents... not according to the commentary... we were able to work as a group and formulate some compliant sheets and procedures - problem solved!

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"?

I'm not getting into the ethical vs unethical argument, but I would think that 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.

Maybe not, raitchjay, but that is exactly the point David is making. Your prudent and ethical may be different than mine and if we each run a bank, we can each decide what businesses fit that description.

:rant warning:
The notion of regulating subjective decisions is bugnuts. We can say we don't agree with the OP's bank's stance on who they will or won't lend to but that's the end of it. They get to decide and they have to live with that decision. They may even end up defending their stance in court in this over litigious society we live in where everyone is positive they're entitled to everything they want but again, that's the OP's bank's choice.

Now we return you to the question of what denial reason to show on the AAN.

Obviously, every bank has to make their own decisions and live with them. Carrying that to the extreme, there would be no reason for anyone to ever ask a question on this board......

All anyone has said is that we believe there ARE reasons to be concerned about what many of us believe to be superfluous, 'big brother' ideas about credit decisions.

I don't understand 'superfluous 'big brother' ideas about credit decisions.'
We're debating whether the bank can decide who they want to lend to based on where they work.
The answer is that as long as they're not denying a protected class, yes they can.
Banks do it every day, whether it's where the person works, what kind of property they have for collateral, whatever.
Again, we don't have to like or agree with their criteria but they're not breaking any laws or violating any regulations.

And all the OP asked was what denial reason he should use, not whether we agreed with his bank's criteria.

Whether they're 'breaking any laws' would ultimately be for a court to decide. I think disparate treatment, disparate impact, and UDAAP concerns have been raised. Obviously, some disagree that any of those are an issue, and every bank is free to make whatever decisions they want to about anything.

I think a carte blanc "thou shall not lend to anyone at [pick one] legal occupation" is an extremely outdated and unfair policy. Proven income over a realistic period of time should overrule any of that.

But again, I don't work for the OP's bank, so my opinion is just that...mine.

Beyond that, I think RRBecca hit a big nail on the head in her post above.

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.

How can it be "unfair" yet not be a UDAAP issue?

Exactly! I got involved in this because the consensus of the group was that the OP's bank was doing something illegal. No they aren't - as long as they are not illegally discriminating - which I defined from Reg B.

As Truffle said "we don't have to like or agree with their criteria but they're not breaking any laws or violating any regulations."

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"?

Might want to review this and then tell us which specific element of a UDAAP you are referring too that denying a loan would trigger:

https://s3.amazonaws.com/files.consumerf..._procedures.pdf

Ya'll seem to be saying there's no litigation risk (at least, no risk of actually losing the lawsuit) for having a policy of "we don't lend to people who work at strip joints in any capacity". Just not sure i agree with that.

Marijuana related, strip club related - what is the difference?

Isn't one illegal (federally), and the other not?

I have made a couple of stripper loans, paid well both of them. I am just glad I am not the teller accepting the cash for the payments..

!

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.

quote]Ya'll seem to be saying there's no litigation risk (at least, no risk of actually losing the lawsuit) for having a policy of "we don't lend to people who work at strip joints in any capacity". Just not sure i agree with that.[/quote]
How is not making you a loan a legal risk? You're going to sue me because I must make you a loan? Again, I can decide your LTV or DTI it too high. Is that unfair? You probably think so or you wouldn't have applied. Can you sue me for that. Sure. Would you win? Probably not.

The entire point of my getting involved in this discussion is many of you are making up rules that don't exist. If you're a naysayer, you're not working for the betterment of your bank. We can disagree on what's "ethical", but there should be no argument that this is not illegal or a UDAAP issue.

But for fair lending....if you don't lend to certain businesses or occupations, that better be in your loan policy and there better not be exceptions.....just a thought for discussion.

Fair Lending isn't a regulation in itself. It's more of a concept....seems examiners can twist it any way they want to.

Not making me a loan because my DTI blows and not making me a loan because you don't like my legal profession are two entirely different things.

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!

I'm not trying to say the bank *can't* have a policy that says "we don't lend to these types of people" as long as it isn't about a prohibited basis. All I'm saying is that if you have such a policy, own it and be honest about your reason to deny. If your bank has that policy and you are too embarrassed to quote it directly as the denial reason, maybe it's time to take a hard look at the policy in question.

This thread is fascinating

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.

Hear, Hear

::applauds:: So very well said.

I agree Richard wrote a good summary and I agree with most of it. The last paragraph says "you've probably decided that occupation/industry prescreening is more trouble than it's worth." That's his opinion. For many others I talk to, it IS worth it. The bottom line is, it's okay to deny someone for any reason you want - other than a protected class reason. What would you list as a reason for denial? Just be honest. I also agree you need to apply this consistently.

If someone moonlighted as a stripper, I wouldn't hire them. Discriminatory? Yes. Illegal? No. I have that right and working for me is not a right.

I agree with Darth....fascinating!!

I agree and second the motion....with RR Joker.

Yes, that is no more than my opinion. As you say, disqualifiers are business decisions and I don't disagree with your conclusion.

This practice will always create tension between the camp that focuses more on reputational risk and those whose main concern is the legal headaches that can result from credit decisions that appear to be made on an illogical basis. Both are business risks.

I share the concerns that you, Becca, and others raise about the explanation that will be stated in the AANs sent to the strippers who pass the first 5 "C"s of credit with flying colors and only fail on #6--clothed. The need for AANs to be brutally honest increases as the reasons for the credit decision become less and less logical. Knowing the day will come when lenders must issue AANs dealing entirely with the 6th "C", it's imperative that policy and procedure is crystal clear, and leaves no room for personal attitudes. The Supreme Court can operate with a "know it when we see it" standard, but the rest of us have to define "it" in advance.

I feel like banks who have this sort of policy are, in a sense, kicking the can down the road. If every bank in America tomorrow suddenly stopped all lending to people who are strippers, bartenders, tattoo artists, (insert profession you are offended by), i believe there would be legislation in a year stopping such "discrimination".

The reputational risk does run both ways. I can appreciate the bank's decision about the reputational risk should it be disclosed if they are lending to people in "gutter industries". Conversely, if the declined applicants go to the media (social, print, mass, etc.) it could also become a reputational issue of the bank judging the individual workers in those industries by their perception of the industries being good or bad.

I think the discussion presented many facets of lending, with defendable positions on both sides.

VERY well stated, Richard.


That made me laugh out loud!

My last comment on this (I hope, but don't promise) is that I'm not arguing for a policy that says you shouldn't make loans to strippers (or any other "unethical" business). My involvement was simply to point out people were making up rules that don't exist. In my opinion, the first 8 or 10 posts to this thread appeared to say "you have to make this loan". No you don't. There may be other risks for not making a loan to an "unethical business" (however, you define that), but they are not ECOA or UDAP risks.

Is it odd that I read David's post in his voice?

!!! Me too!

Too funny - that means we've all listened to him, too much perhaps?

I don't think the term "too much" exists where David is concerned......could listen to him all day, I think.

I sure never said " you have to make this loan". I just said there were certainly risks involved with having such a policy.

You all make me laugh!

Same here.

😊

Good discussion, sorry I was unavailable for a few days.

Applaud Richard's response!!
Nice debate and no snarky attacks, yeah!

For my own post, wasn't saying they had to make the loan (agree with David here), only that I think their policy is unfair. But that's just my opinion. I feel that credit decisions should be based on credit, not where they work, the color of their hair, how many tats they have, etc.