VIDEO: Credit Report Fees and Fair Lending
In this Compliance Clip (video), Adam talks about how credit report fees can relate to fair lending. In particular, Adam describes how differences in credit report charges may lead to a fair lending violation under Regulation B.
Video Transcript
The following is a transcript of this video:
This Compliance Clip is going to talk about credit report fees and fair lending. In other words, how credit report fees can relate to fair lending. In fact, I got the question the other week that I've received several times over the years. The question went like this: A couple of years ago, we were challenged by an examiner about charging for credit reports as we charged $15 for a single credit report and $25 for two borrowers, which was the actual cost of the credit reports charged to us, which in this case was a bank or a financial institution. What they're saying is the examiners would rather have us charge a single borrower $15 and the two borrowers $30, which seems unfair to upcharge the two borrowers by $5 just to be fair to single borrowers. Can you provide guidance on this for us?
Of course, I can. I’m happy to. In fact, fair lending is one of the topics I love to talk about so this Compliance Clip's going to be a little bit longer than normal. The answer to this of course is going to come from Regulation B, specifically Part 1002.6(b)(8), but also we're going to get our answer from the Fair Lending Exam Procedures.
Let's first go to the Fair Lending Exam Procedures because what they talk about there is about the three types of fair lending violations that are recognized by the court. Three types of discrimination. These three types of discrimination include Overt Evidence of Disparate Treatment, Comparative Evidence of Disparate Treatment and Disparate Impact. Now this question really relates to Disparate Impact so that's what we're going to unfold here.
What is Disparate Impact? It occurs when a lender, and this could be an actual loan officer or a bank as a lender, but when the lender applies a racially or otherwise neutral policy or practice equally to all applicants, but the result is discrimination of a protected class. You have a policy or procedure that seems to be fair, seems to be fine, but the result is that it unproportionately hurts a protected class.
From the Inter-agency Exam Procedures, they expand this. They say, “When the lender applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy of practice disproportionately excludes or burdens certain persons on a prohibited basis, then the policy or practice is described as having a disparate impact.” That is one of the types of discrimination recognized by the courts and that should be considered a risk category in your fair lending risk assessment. This is a concern.
Let's look at what a protected class is under Regulation B. Of course, a protected class under Regulation B includes all of these things, quite a few things. It includes race or color, religion, national origin, gender, marital status, age, income for public assistance and consumers rights to exercise their rights under the Consumer Credit Protection Act. Specifically our question here relates to what? It relates to marital status. This is a protected class, marital status is a protected class.
Let's move on. Let's talk about Regulation B and where the rule actually comes in. It's from 1002.6(b)(8). It says this. It says, “Except as otherwise permitted or required by law, 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, absence or likelihood of a marital relationship between the parties. Essentially what happens when you're charging $15 for single applicants and $25 for married applicants, if you have two single applicants whether they're siblings, parents, or people in relationship who are living together. Maybe you have two people who are living together, but they chose not to get married and they don't believe in marriage. They're living together. If they apply for a loan, you're essentially going to charge them $30 for two single applicants, two single credit reports, so 15 each is $30. If you have a married couple, like my wife and I come in, you're going to charge us $25. Essentially what's happening is that unmarried couples chosen to live together and not get married yet at this time, you are charging them $5 more. In some cases at some financial institutions it is even more substantial than $5, but in this specific example, in this question it is $5 more. Based on that, you're treating them differently than if they were married and therefore it's considered Disparate Impact. It is a risk of a fair lending violation. In fact, I would consider that a fair lending violation. In fact, over the years, examiners have brought this up in many financial institutions. This should be old news for many of you, but this is a concern, and this is how this all plays out.
As far as the solution, if you do have a credit reporting agency, who's still charging you different amounts for single applicants and for married applicants where it doesn't add up for two single applicants, which we should have this resolved by now. Apparently it's not because I received this question. I think it was this week or last week, I just received this question. I've been dealing with this question for two decades, but if your credit reporting agencies are still charging different amounts and you have this conservative disparate impact, you have two possible solutions.
Number one is you could talk to a credit reporting agency and believe me, they will happily charge you more for your married applicants so that everybody's getting charged 30 when there's two applicants. You have single credit reports of $15 each and you're married, a joint credit report is $30. They will happily increase that fee. What you shouldn't do is just increase it for yourself. You need the credit reporting agency to increase it, because if you increase it yourself, you're actually going to kickback and under Regulation Z that's prohibited. You have to disclose it properly, et cetera, et cetera. So your first option is to have your credit reporting agency increase the amount.
Your second option is to not charge for credit reports and to absorb the fee. That's an option, you don't have to charge for credit reports at all. You can absorb the fee and the way this works is you just absorb it. If you want to recover that cost, you could actually increase the processing fee, but it can't be directly related to the credit report fee and your processing fee would have to be the same across the board. You're not going to charge married applicants a lesser processing fee, that would be problematic for disparate impact as well, but that's your other solution.
So two solutions are to have the current reporting agency charge the same amount, or you can absorb the fee and not charge anybody. Then that makes the issue go away. So both non-married and married applicants are being charged the same for credit reports.
That was a pretty deep dive into fair lending. If you love fair lending, as much as I, you might enjoy our Fair Lending Bootcamp, where I spent a full day, I think a full six hours of video training, it takes a whole day to get through if not more. Fair Lending Bootcamp is in our stores. If you love fair lending as much as me, want to take a deep dive like this, take a look at our store compliancecohort.com/store, and look specifically for Fair Lending Bootcamp. If you're interested in just Reg B, we have a course on that as well.
That's all I have for this Compliance Clip.