Topic: Equal Credit Opportunity Act (ECOA)
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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…
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Our bank operates a mortgage company that purchases loans after they have closed through the correspondent lending channel. The loans close in the name of a third-party originator (TPO) after an underwriter at our mortgage company reviews the loan file and issues underwriting conditions to the TPO. If we deny a loan application, should our mortgage company issue an adverse action notice and list our regulator or should the TPO issue the notice and list its regulator? If our mortgage company issues the adverse action notice, should we reference the TPO on the notice?
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We believe that either your mortgage company or the TPO can issue the adverse action notice, and the notice should disclose each creditor involved in the adverse action decision. Regulation B provides that when a loan application is made on behalf of an applicant to more than one creditor and no credit is offered (or…
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Our loan department is considering lending to minors if they have a parent or guardian as a co-borrower. Can we limit this lending to loans with a security interest in an automobile? If title to the vehicle is in the minor’s name, what issues could we run into if we try to collect on the note or repossess the vehicle?
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Limiting Minor Borrowers to Auto Loans In Illinois, the general rule is that minors cannot enter into legally binding contracts, since an agreement with a minor is voidable by the minor until they reach the age of majority (which is eighteen in Illinois). There are some exceptions to this general rule, as in cases of…
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Our loan department is considering extending auto loans to minors with an adult co-borrower. Can we require the co-borrower to be the minor’s parent or guardian? What would happen if the adult co-borrower dies, leaving only the minor on the loan? Can we pull credit reports for or report negative credit information on a minor?
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Requiring a Parent or Guardian to be a Co-Borrower Yes, we believe you may require the co-borrower for a loan to a minor to be the minor’s parent or guardian, as a minor cannot enter into a legally binding contract in Illinois. In Illinois, the general rule is that an agreement with a minor is…
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We deny an applicant’s request to open a deposit account for two reasons: (1) if the applicant is outside of our market area, or (2) if we receive a negative ChexSystems report. Do banks deny deposit account requests for any other reasons?
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We do not have access to data on our members’ reasons for denying deposit accounts, but a few examples we have seen are denials for failing to meet certain qualifications for a particular account type (such as a minimum deposit amount or special qualifications for health savings accounts) and one instance of a denial due…
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In August 2022, the FDIC amended its Equal Housing Lender poster to reflect that the former Consumer Response Center had been renamed as the National Center for Consumer and Depositor Assistance. However, Regulation B’s adverse action notice information still references the Consumer Response Center. Should we continue to refer to the Consumer Response Center in adverse action notices? Also, does the Equal Housing Lender poster no longer have an image of a house at the top of the page?
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We recommend referencing the “Division of Depositor and Consumer Protection, National Center for Consumer and Depositor Assistance, Federal Deposit Insurance Corporation” on adverse action notices. The CFPB just today released a final rule amending Appendix A to Regulation B to change the contact information for the FDIC required in adverse action notices from “FDIC Consumer…
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A business customer would like to open a jumbo certificate of deposit (CD) and take out a loan secured by the CD. The borrower has requested a lower interest rate on the loan, in exchange for accepting a lower interest rate on the CD. Is this arrangement permissible? We do not advertise such arrangements but would be willing to offer the same terms to other qualified borrowers.
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We believe this arrangement is likely permissible, but we recommend addressing the fair lending concerns that could be raised by making a special arrangement for one borrower. There are very few limitations on interest rates charged by banks under Illinois law, provided they are agreed to by your customers in your loan agreements. The Illinois…
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A business wants to open a checking account with our bank. A few years ago, we denied their request for an account based on several negative ChexSystem reports. We no longer subscribe to ChexSystems and cannot run a similar check. Can we refuse to open this account, and do we have to provide an adverse action notice with our reasons or documentation?
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No, we do not believe that you need to provide an adverse action notice when denying a business’s request for a checking account. The Fair Credit Reporting Act (FCRA)’s requirement to provide adverse action notices applies only to persons taking adverse action against consumers. Consequently, we believe you may refuse to open the checking account…
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A private group is developing a subdivision and has been unable to sell the new homes. The group wants to partner with us to offer incentives to promote more sales in the subdivision. Our bank wants to offer special terms to the first four customers who buy one of the new homes in the developer’s subdivision — such as balloon loans that would be interest-free for the first three years of the loan term. Would there be any fair lending issues associated with offering these loan incentives only to customers who want to buy homes in this subdivision?
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Yes, we believe there may be fair lending issues associated with offering favorable loan terms only to customers who buy one of the developer’s new homes, since the basis for qualifying for the incentive would be the geographic location of the property securing the loan. It appears that this incentive would violate the Illinois Fairness…
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Can you recommend any resources or guidance on using customer data for targeted marketing purposes? We have been using zip codes for targeted marketing promotions. Are there any limitations on data targeting that we should be aware of?
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Yes, when considering targeted marketing campaigns, you should consider whether any fair lending laws or UDAAP concerns will be triggered. We recommend carefully considering whether any targeted marketing campaign may be viewed as discriminatory or having a disparate impact on a protected class and thoroughly documenting your business reasons for engaging in such a campaign.…