Regulation B [Before & After Dodd Frank]

Regulation B: Then & Now

Disclaimer: This article does not represent legal interpretation or advice.

In 1974, Regulation B introduced creditors to the Equal Credit Opportunity Act (ECOA), making “credit equally available to all credit worthy customers without regard to sex or marital status”. In summary, the law prohibited “any creditor to discriminate against any applicant with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract).” The law also made it unlawful to discriminate if “all or part of the applicant’s income derives from any public assistance program” or “because the applicant has in good faith exercised any right under the Consumer Protection Act.”
On January 18^th, The Consumer Financial Protection Bureau (CFPB) issued a final rule on Regulation B, which implemented an amendment regarding furnishing copies of appraisals and other valuations. In short, lenders must now provide copies of valuations to applicants promptly upon completion. In addition, creditors must now notify applicants within three business days of receiving an application that they have a right to receive a copy of appraisals.
In the eyes of the CFPB, ECOA and Regulation B have been and will continue to be the cornerstones of consumer protection and fair lending. In theory, this amendment further helps applicants determine if a loan application was denied due to discrimination. The new requirements notify consumers of their need to rehabilitate their creditworthiness or correct erroneous information provided by the lender. Furthermore, the reports make it easier to inform applicants of how the value of a property was deduced. In total, this new rule:

• Requires creditors to provide applicants a copy of each appraisal and other written valuation promptly upon their completion  but no later than three business days before consummation
• Permits applicants to waive the timing requirement for providing these copies. However, applicants who waive the timing requirement must do so at least three business days prior to consummation and must be given a copy of all appraisals and other written valuations at or prior to consummation.
• Necessitates that copies of the valuations must be delivered no later than 30 days later after the creditor determines the transaction will not be consummated.
• Prohibits creditors from charging for the copy of appraisals and other written valuations, but permits creditors to charge applicants reasonable fees for the cost of the appraisals or other written valuation unless applicable law provides otherwise
• Does not apply to HPML loans.

In addition to Home Mortgage Disclosure Act (HMDA) reviews, originators should be ready for any ECOA Examination Procedures as part of the CFPB’s Fair Lending Review. The “ECOA Baseline Review Procedures” given to examiners contains six modules that “identify and analyze risks of ECOA violations, to facilitate the identification types of ECOA and Regulation B violations, and to inform fair lending prioritization for future CFPB review.” According to §1002.16(2)(b) fees limited to $10,000 may amount to lenders in individual violations and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions.  In order to avoid these fees, here are 8 Regulation B tips:

8 Regulation B Tips

1. Do not discriminate (§1002.4)

More than the treatment of borrowers during the application process, ECOA regulation is concerned with the originator’s behavior. In the rule, Regulation B contains two major prohibitions against discriminatory practices. The first is that “a creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction”. The second extends even to advertising. It states, “a creditor shall not make any oral or written statement… that would discourage, on a prohibited basis, a reasonable person from pursuing an application.” This rule eliminates the use of:

• Prescreening tactics
• Scripts or rate quotes that discourage minorities

2. Do not improperly request information (§1002.5)

Regulation B creates a delicate balance. Lenders must narrowly walk between the necessity to know about a prospective borrower and the borrower’s right to not disclose information. Refrain from asking for prohibited information during conversations with applicants prior to the interview phase (that is, prior to an application) as well as when a written application is taken. Prohibited information includes the applicant’s race, color, religion, national origin, and sex. There are exceptions to the rule, however. A creditor may request prohibited information when:

• It is in connection with a self-test (described in §1002.15)
•  It is for monitoring purposes in relation to credit.
•  It helps determine if applicant is eligible for special-purpose credit programs, such as some bond programs

Unless the applicant wishes to rely on alimony or child support, these items cannot be used to determine creditworthiness either. The mortgage company must give a disclosure whenever it requests information concerning income or the source of income (§1002.5(d)(d)). It must state that the disclosure of alimony, child support, or separate maintenance payments is not required.

3. Use 1 of 2 ways to evaluate creditworthiness (§1002.6)

Creditors can use traditional methods of determining creditworthiness, such as a lender’s subjective evaluation or statistically developed techniques such as credit scoring. In this matter, Regulation B “neither requires nor endorses any particular method of credit analysis.” Any system, however, that is not empirically derived and statistically sound is considered a traditional, judgmental evaluation system. When performing a traditional evaluation, however, the following factors may not be used to evaluate creditworthiness:

• Age
• Childbearing or childrearing
• Telephone listing
• Source of Income
• Marital status
• Race
• Color
• Religion
• National origin
• Sex

4. Preserve all records for 25 months (§1002.12)

After the applicant has been informed of an adverse action taken or of an incomplete application, a mortgage company must preserve all written or recorded information for 25 months. These files cannot be used in evaluating applications. The information is used as evidence to adverse actions or any statement from the applicant alleging a violation of Regulation B. This rule also applies to companies that make offers of credit to potential customers by prescreening. In this case, the following must be kept:

• The text of any prescreened solicitation
• The list of criteria used to select recipients
• Any correspondence related to complaints about the solicitation

5. Provide Appraisal Reports (§1002.14)

As previously mentioned, the Regulation B’s new rules require the lender to provide applicants with copies of the appraisal and other valuations promptly after completion. Applicants may waive the timing requirement and agree to receive the copies at or before the close of the loan. These waivers must be signed at least three days before the loan closes unless the valuation only contains clerical changes from a previous version. Lenders must mail or deliver a notice electronically to the applicant no later than three days after loan application submission that demonstrates their right to receive a copy of all written appraisals. Lenders cannot charge applicants for copies of appraisals but may charge reasonable fees to reimburse creditors. Finally, these rules apply whether credit is extended or denied or if the application is incomplete or withdrawn.

6. Provide timely adverse action notice (§1002.9(a))

Any adverse action notification must be written and contain the banks information and the nature of the action taken. In addition, Regulation B requires that an ECOA notice must be provided that includes the federal agency responsible for enforcing compliance with the act. This notice can be included on the adverse action notification. If the specific principal reason for the action taken is not mentioned, the mortgage company must notify the applicant that he/she can request the reason(s) for denial within sixty days.

7. Defer to federal law if state is inconsistent (§1002.11)

Regulation B alters, affects, or preempts state laws that are inconsistent with it. The CFPB considers a state law to be inconsistent if it meets the following criteria:

• Requires or permits a prohibited practice
• Prohibits the individual extension of consumer credit to both parties of a marriage if each spouse individually applies for credit
• Prohibits inquires or collection of data required to comply
• Prohibits asking about or considering age in an empirically derived, “demonstrably and statically sound, credit scoring system”

8. Do not improperly obtain signatures (§1002.7)

If the applicant individually qualifies under the creditor’s standards of creditworthiness, additional signatures from an applicant’s spouse or another person cannot be obtained per Regulation B. In this case, the lender cannot deem the submission of a joint financial statement as an application for joint credit.

MortgageDashboard & Regulation B

Dodd Frank continues to burden loan officers well after it’s implementation earlier this year. As enterprise-level mortgage companies pour more time, resources and expenses into developing skilled compliance teams, some of the nation’s top producing institutions are relying on MortgageDashboard, a total loan origination solution. As a scalable SaaS cloud-based system, MortgageDashboard comes built-in with compliance management software that is routinely updated by our team of regulatory experts. As new laws are introduced, MortgageDashboard meets and exceeds the expectations of branch managers looking for peace during compliance. Discover more today!

Discover More!