In March, some New England area banks received notice from the Federal Deposit Insurance Corporation (FDIC) New York Division of Supervision and Consumer Protection that a recent examination found potential violations of the Equal Credit Opportunity Act (ECOA) for Fair Lending violations pertaining to the fees and processes imposed upon consumers for the credit reports related to their mortgage loans.
The credit reporting practices in question have been found to violate ECOA Section 202.4 (a) of Regulation B which prohibits a creditor from discriminating against an applicant in any aspect of the credit transaction on the basis of marital status. Further, Section 202.2(m) of Regulation B defines a credit transaction broadly to include “every aspect of an applicant’s dealings with a creditor regarding an application for credit or an existing extension of credit (including, but not limited to, information requirements; investigation procedures; standards of creditworthiness; terms of credit; furnishing of credit information; revocation; alteration or termination of credit; and collection procedures).” The preliminary findings continue with citations from Section 202.6(b)(8) of Regulation B which requires that “a creditor shall evaluate married and unmarried applicants by the same standards; and in evaluating joint applicants, a creditor shall not treat applicants differently based on the existence, absences or likelihood of a marital relationship between the parties.”
So, why are these credit reporting practices setting off so many alarms?
From the fee structure perspective, it is the difference in the price of the credit reports that some banks have negotiated with their credit reporting agencies that give a price reduction to co-applicants that are traditional “joint” credit files (typically a husband and wife) which is not available to non-traditional co-applicants that are unmarried. This discounted credit report fee, which in one case created a $32 difference when the fees are passed along to the consumer, as a settlement services charge at closing. That fee difference discriminates against the unmarried co-applicants based on marital status and is a violation of the ECOA sections cited above.
From a processes perspective, unmarried co-applicants were also found by the FDIC examiners to have some discriminatory issues. One of the banks the FDIC noted on the violations was due to the requirement that unmarried co-applicants complete separate applications, while married co-applicants completed a single application. This requirement is a violation of the “same standards” regardless of marital status provisions of the above sections.
While correcting the pricing issue for ECOA compliance is fairly simple: Make sure that whatever the price a “joint” credit report is, the cost of two individual credit reports equals that same amount. Correcting the application processes issue is something more complex. The National Credit Reporting Agency Inc. (NCRA) has discovered that some loan origination systems (LOS) have requirements that split unmarried co-applicants into two separate applications for processing. This varies from system to system, and can even also vary pending the current address status of the co-applicants. On some systems, if the co-applicants are currently residing at the same address, they can be entered on a single application. However, this is more of a problem when the co-applicants are residing at different locations at the time of the loan application. Some LOS do not have the ability to enter different addresses for co-applicants on a single application, regardless of marital status. This can also be problematic with the transfer of that data from the workflow of the LOS, to the mortgage credit reporting agency, to the national credit repositories and back with the credit report. Of course, with several different systems involved, this is not as simple of a fix as just making sure married couples no longer receive a few dollars discount on their credit report verses unmarried co-applicants.
Mortgage originators should take notice of this action and review their credit report fee structures for this issue, as well as their application processes. While the spirit of the law has not been violated, no one is being denied credit based on marital status, the law is clear and the FDIC seems intent on pushing it to the letter with regards to the equal treatment for “any” aspect of the loan transaction since they have referred some banks to the U.S. Department of Justice for a “Significant Violation” of the ECOA.
Terry W. Clemans is the executive director of the National Credit Reporting Association Inc. (NCRA).