IBA Compliance Connection

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We received a loan application from a customer who previously defaulted on a car loan extended by our bank, twelve years ago. We had to repossess the car and obtain a deficiency judgment. The customer refused to pay the judgment, and we were able to collect it only after the customer later sold real property. Now the customer has clean credit, but based on the prior repossession and collection action, we plan to reject his loan application. Will this decision create any fair lending issues?

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No, we do not believe that rejecting a loan application for legitimate business reasons should create any fair lending issues, provided that your bank complies with its adverse action requirements. Regulation B allows a creditor to consider “any information obtained” in connection with an application for credit, provided that the information is not used to discriminate against an applicant on a prohibited basis.

Because your bank is not discriminating on a prohibited basis (such as race, color, or exercise of rights under federal consumer protection laws), we believe that the fair lending risk of this credit decision is low. To mitigate these minimal fair lending concerns, we recommend documenting your legitimate business reasons for rejecting the loan.

For resources related to our guidance, please see:

  • Regulation B, 12 CFR 1002.6(a) (“General rule concerning use of information. Except as otherwise provided in the Act and this part, a creditor may consider any information obtained, so long as the information is not used to discriminate against an applicant on a prohibited basis. . . .”)
  • Regulation B, 12 CFR 1002.2(x) (“Prohibited basis means race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); the fact that all or part of the applicant’s income derives from any public assistance program; or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Bureau.”)
  • OCC Comptroller’s Handbook, Fair Lending (January 2023), page 157 (“The single fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. Where the policy or practice is justified by ‘business necessity’ and there is no less discriminatory alternative, a violation of the FH Act or the ECOA will not exist. . . . When an Agency finds that a lender’s policy or practice has a disparate impact, the next step is to seek 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.”)