Caps on Loan Amounts (Auto Loans)

Can/do banks have underwriting policies/procedures that limit the amount of money the bank would loan an applicant with no credit file or limited credit (say less than five trades on their bureau)? Say in a situation of joint applicants, one has good credit, the other no credit, can we have a policy that would cap loans at $20,000 (if there is an applicant on the loan with no/limited credit)? Or would such a practice be considered discriminatory?

Purely a business decision. Not sure how if applied equally that would create any fair lending issues.

Arbitrary policies can become discriminatory if you allow exceptions. To minimize that risk, policies must be very specific...leaving very little room for judgement or exceptions by your lending staff.

Be careful in your research and wording. While the policy applies to all, it would have a greater effect on young people who have not had a chance to build credit, and certain groups who use credit in limited amounts. (Look at the wording for effects test in the OSC for ECOA.) I also take exception to the part about limiting credit where one party has excellent credit and the other, limited. That is the primary reason why many parents co-borrow with their children, to start them off for credit. The person with good credit would be responsible, why would the bank be limiting them?

Based on a recommendation, I added my daughter (joint owner) of a credit card when she turned 18. She never abused it, and added a credit card on her own, has a credit score of over 800, no other debt. Would the bank turn her down for a car loan over $20k?

Original anon here. Thank you all for your feedback, it is much appreciated. Rocky P you mentioned checking the wording for effects test in the OSC for ECOA - what part of the commentary is this in?


Do any banks offer first time car buyer programs, and if so how are these structured? Are these seen as discriminatory? As Rocky P stated, often this type of scenario (initially asked about) comes up with a teen/child and their parents wanting to purchase an auto.

1002.6

"Official Interpretation
6(a) General rule concerning use of information.
1. General. When evaluating an application for credit, a creditor generally may consider any information obtained. However, a creditor may not consider in its evaluation of creditworthiness any information that it is barred by §1002.5 from obtaining or from using for any purpose other than to conduct a self-test under §1002.15.

2. Effects test. The effects test is a judicial doctrine that was developed in a series of employment cases decided by the U.S. Supreme Court under Title VII of the Civil Rights Act of 1964 (42 U.S.C. 2000e et seq. ), and the burdens of proof for such employment cases were codified by Congress in the Civil Rights Act of 1991 (42 U.S.C. 2000e–2). Congressional intent that this doctrine apply to the credit area is documented in the Senate Report that accompanied H.R. 6516, No. 94–589, pp. 4–5; and in the House Report that accompanied H.R. 6516, No. 94–210, p.5. The Act and regulation may prohibit a creditor practice that is discriminatory in effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. For example, requiring that applicants have income in excess of a certain amount to qualify for an overdraft line of credit could mean that women and minority applicants will be rejected at a higher rate than men and nonminority applicants. If there is a demonstrable relationship between the income requirement and creditworthiness for the level of credit involved, however, use of the income standard would likely be permissible."

And from an OCC Fair Lending Exam Guidelines


Disparate Impact
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.”2 (2 Disparate impact has been referred to more commonly by the OCC as “disproportionate adverse impact.” It is also referred to as the “effects test.”)

Example: A bank’s policy is not to extend loans for single family residences for less than $60,000.00. This policy has been in effect for 10 years. This minimum loan amount policy is shown to disproportionately exclude potential applicants based on race from consideration because of their income levels or the value of the houses in the areas in which they live. 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. Finally, evidence of discriminatory intent is not necessary to establish that a bank’s adoption or implementation of a policy or practice that has a disparate impact is in violation of the FH Act or ECOA.

These procedures do not call for examiners to plan examinations to identify or focus on potential disparate impact issues. The guidance in this introduction is intended to help examiners recognize fair lending issues that may have a potential disparate impact. Guidance in appendix G, “Other Types of Discrimination Analyses,” provides details on how to obtain relevant information regarding such situations, and methods to evaluate and follow up, as appropriate.

Always remember that the fat lady never stops singing! The most-carefully designed policy can always succumb to an after-the-fact "effects test." If a portfolio analysis later reveals disparities that disproportionately affect members of protected classes, it doesn't matter how or when you got to that unhappy position.