7 Reg B Violations: Compare Your Fair Lending Compliance Program

December 17, 2012

Posted by Andy Barksdale

The CFPB recently published their first Annual Fair Lending Report.  Inside the report, the CFPB shares the most common Reg B violations from the CFPB, FRB, FDIC, OCC, NCUA and FCA.  

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We recommend that every financial institution should take a couple minutes to review the "most frequently cited Regulation B violations" in order to compare their existing Fair Lending compliance management system:

  • Common Violation #1:  Discrimination on a prohibited basis in a credit transaction.
    • Reg B Background - 12 C.F.R. § 1002.4 - The general rule covers all dealings between an applicant and a creditor (remember, ECOA is about any aspect of a credit transaction from cradle to grave). 
  • Common Violation #2:  Improperly requesting information about race, color, religion, national origin, or sex.
    • Reg B Background - 12 C.F.R. § 1002.5 - The general rule governs the type of information that a creditor may gather (there are limitations on the information you may collect about race, color, relition, national origin or sex).
  • Common Violation #3:  Failure to collect information about applicants seeking credit primarily for the purchase or refinancing of a principal residence, including applicant race, ethnicity, sex, marital status and age, for monitoring purposes.
    • Reg B Background - 12 C.F.R. § 1002.13 (a) and (b) - The general rule governs the type of information that a creditor should request when an application relates to a dwelling that is or will be occupied by the applicant as the principal residence.  
  • Common Violation #4:  Failure to provide sufficient information, including specific reasons for adverse action, in adverse action notification.
    • Reg B Background - 12 C.F.R. § 1002.9 (a)(2) and (b)(2) - Notifications given shall be in writing and shall contain a statement of the action taken; the name and address of the creditor; a statement of the provisions of the Act; the name and address of the Federal Agency that administers compliance with respect to the creditor; and either a statement of specific reasons for the action taken OR a disclosure of the applicant's right to a statement of specific reasons. 
  • Common Violation #5:  Improperly requiring a borrower to obtain the signature of a spouse or other person in order to be considered for credit approval.
    • Reg B Background - 12 C.F.R. § 1002.7 (d)(1) - The signature rules ensure that qualified applicants are able to obtain credit in their own names.  In general, a creditor may not require the signature of another person unless the creditor has first determined the applicant alone does not qualify for the credit requested.  Note:  community property states should consider applicable state laws.
  • Common Violation #6:  Failure to provide timely adverse action notices, incomplete documentation to support adverse action taken, or failing to give specific reasons for adverse actions taken.
    • Reg B Background - 12 C.F.R. § 1002.9 - After the application is complete, a creditor shall notify an applicant of action taken within 30 days.  Creditors shall also notify an applicant within 30 days after taking adverse action on an incomplete application.  
  • Common Violation #7:  Failure to complete voluntary monitoring forms when borrower chose not to provide requested information regarding ethnicity, race, and sex.
    • Reg B Background - 12 C.F.R. § 1002.13 (b) - A creditor that receives an application for the purchase or refinancing of a dwelling occupied as a principal residence, shall request ethnicity, race, sex, marital status, and age.   The information may be listed, at the creditor's option, on the application form or on a separate form that refers to the application. The applicant(s) shall be asked but not required to supply the requested information. If the applicant(s) chooses not to provide the information or any part of it, that fact shall be noted on the form. The creditor shall then also note on the form, to the extent possible, the ethnicity, race, and sex of the applicant(s) on the basis of visual observation or surname.

How does your financial institution's performance compare to these violations?  Do you have the right policies, procedures, audits and reviews to know the answer?  

The CFPB does not claim that this is an exhaustive list of violations.  However, we do see many of these same recurring issues in our consulting work.  

Bottom Line:  Compliance officers and senior management are asked to lead compliance programs that proactively manage the risks associated with fair lending violations.  Reviewing the most frequently cited violations allows us to focus our time and attention towards the biggest areas of risk. Strong risk management programs succeed by implementing policies, procedures and practice monitoring to ensure that proper Reg B protocols are being followed (e.g. well defined policies, loan officer training, secondary compliance reviews, and audits).

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Topics: FRB, CFPB, FDIC, OCC, Reg B, NCUA