QUESTION
Most of our loan products are geared toward consumers of all ages. But we linked a person's age to the eligibility criteria for one of our products and then correlated it to income from public assistance. The aim was to offer a loan product that would benefit older adults on public assistance.
This did not sit well with our regulator. We're now in hot water for violations of ECOA. Our compliance team reviewed this loan, and our attorneys reviewed it, too. Yet, here we are, facing down the barrel of a regulatory nightmare.
I am an underwriter and just following the guidelines. But even I knew this loan was going to be risky.
How should we figure a person's age in evaluating the application?
And, is there a rule for considering income from public assistance of an applicant?
ANSWER
I wish you had contacted me before getting into such a debacle. Combining age eligibility with public assistance criteria is like mixing water and oil. Under the Equal Credit Opportunity Act (ECOA), that's two strikes – not three! – and you're out.
Let's keep it real. With limited exception, a creditor may not take into account an applicant's age (provided that the applicant has the capacity to enter into a binding contract).[i]
There are primarily three criteria that a creditor can use to take the age of an applicant into account.
They are:
1. In an empirically derived, demonstrably and statistically sound credit scoring system, a creditor may use an applicant's age as a predictive variable, provided that the age of the elderly applicant is not assigned a negative factor or value. With respect to an "empirically derived, demonstrably and statistically sound credit scoring system," prepare to be seriously challenged on its validity! I'll comment more about the "negative factor or value" assignation below.
2. In a judgmental system of evaluating creditworthiness, a creditor may consider an applicant's age only to determine a pertinent element of creditworthiness. Read on for my comment on a "pertinent element of creditworthiness."
3. In any system of evaluating creditworthiness, a creditor may consider the age of an elderly applicant when such age is used to favor the elderly applicant in extending credit.[ii]
Regulation B, the implementing regulation of ECOA, provides in its Commentary additional details on the consideration of age in the evaluation of an applicant.[iii]
Concerning a "negative factor or value," as these elements pertain to the age of elderly applicants, you need to be very careful in such evaluations. The use of such features means utilizing a factor, value, or weight that is less favorable regarding elderly applicants than the creditor's experience warrants or is less favorable than the factor, value, or weight assigned to the class of applicants that are not classified as elderly and are most favored by a creditor on the basis of age.[iv]
A "pertinent element of creditworthiness" is complex in theory and even more labyrinthine, complicated, circuitous, and tortuous in practice. In relation to a judgmental system of evaluating applicants, it means any information about applicants that a creditor obtains and considers and that has a demonstrable relationship to a determination of creditworthiness.[v] I know that sounds convoluted, and in a sense, it seems so (but it's not). Here is an example. Many lenders know that they may not reject an application because an applicant is sixty years old, but they do not know that they may relate the applicant's age to other information about the applicant that the creditor considers in evaluating creditworthiness, such as the applicant's occupation and length of time to retirement to ascertain whether the applicant's income (including retirement income) will support the extension of credit to its maturity.[vi] This scenario may have been the chute that your compliance people fell through into a regulatory crisis. If not structured properly and narrowly, your loan product was ripe for adverse regulatory findings, all things considered.
I'll get over to the public assistance part of your question momentarily. But should you ask if any other prohibited basis factor in an empirically derived, demonstrably and statistically sound, credit scoring system may be applied, the answer is unequivocally no. Period. A creditor may not take a prohibited basis into account in any system of evaluating an applicant's creditworthiness, except as provided in ECOA and Regulation B.[vii] And this is why you must get competent and experienced guidance from a compliance professional that actually has substantial familiarity with ECOA and Regulation B.
Now, about public assistance income in the evaluation of an applicant. Generally, a creditor may not consider whether an applicant's income derives from any public assistance program.[viii] However, when considering income derived from a public assistance program, a creditor may take into account certain primary factors, such as:
1. The length of time an applicant will likely remain eligible to receive such income;
2. Whether the
applicant will continue to qualify for benefits based on the status of the
applicant's dependents. An example here would be Temporary Aid to Needy
Families or Social Security payments to a minor); and
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] 12
CFR §
202.6(b)(2)
[ii]
12 CFR §
202.6(b)(2)(ii)-(iv); 12 CFR Supp. I to pt. 202 – Offical Staff Interpretations
§
202.2(p)-1
[iii]
12 CFR Supp. I to pt. 202 – Official Staff Interpretations §
202.6(b)(2)
[iv]
12 CFR §
202.2(v)
[v] 12
CFR §
202.2(y)
[vi]
12 CFR Supp I to pt 202 – Official Staff Interpretations §
202.6(b)(2)-3
[vii]
12 CFR §
202.6(b)
[viii]
12 CFR §
202.6(b)(2)(iii)
[ix]
12 CFR Supp. I to pt. 202 – Official Staff Interpretations §
202.6(b)(2)-6
