The ombudsman
received a formal appeal concerning several violations of 12 USC 375
(b)-Extension of Credit to Executive Officers, Directors, and
Principal Shareholders of Member Banks
Background
Bank
management and the board believed that several violations of the
implementing regulation 12 CFR 215 (Regulation O) was subjective in
nature and should not be included in the ROE. Specifically, they disagreed
with the violations citing preferential terms on loans to
insiders. Bank
management believed that several items cited as violations of
Regulation O/Insider Loans were based on subjective judgment and
should not be included as ''violations of law'' in the ROE. Management believed the
violations of law that were cited in the ROE were either technical
in nature or based on a subjective standard that bank management
disagreed with in each case. The bank stated they have
never given preference to directors or principal shareholders on
credit facilities.
The ROE
identified eight violations of Regulation O where extensions of
credit were granted on favorable terms. These included pricing,
waiving of fees, and policy exceptions for a borrower's equity in
real property. The ROE
comments further explained that these violations were technical
because management could not provide transactions considered
comparable by the OCC.
Discussion
Regulation O,
12 CFR 215-Loans to Executive Officers, Directors, and Principal
Shareholders of Member Banks, section 215.4(a)(1)(i), states:
(1) No member
bank may extend credit to any insider of a bank or insider of its
affiliates unless the extension of credit:
(i) Is made on substantially the same terms
(including interest rates and collateral) as, and following credit
underwriting procedures that are not less stringent than, those
prevailing at the time for comparable transactions by the bank with
other persons that are not covered by this part and who are not
employed by the bank; and
(ii) Does not
involve more than the normal risk of repayment or present
unfavorable features.
The ROE
criticized bank management for failing to provide comparable
transactions to the insider loans cited for preferential terms.
The ombudsman's review
revealed that some of the loans provided as comparable transactions
were similar to the insider loans, but there were nuances that
differentiated the transactions and created questions regarding
their comparability. Additionally, the review of
the applicable loan profitability worksheets found that they did not
include all aspects of the customer's relationship with the bank.
In some instances, the
deposit relationship was the factor that lent support to the terms
given to the insiders but it was not included in the profitability
worksheet.
Conclusion
The ROE
specifically concluded that the lack of comparable transactions was
a technical violation because ''the applicable insiders do have
substantial net worth and liquidity and may warrant 'best borrower'
rates.'' This
description is more reflective of a violation of 12 CFR 215.8 (a),
which states:
(A) In
general. Each
member bank shall maintain records necessary for compliance with the
requirements of this part.
Based on the
comments in the ROE and the information provided by bank management,
the ombudsman concluded that the preferential treatment violation
cited in the ROE was not appropriate. However, bank management's
inadequate documentation did not clearly demonstrate compliance with
the prohibition against preferential lending to insiders. Therefore the ombudsman
concluded that the lack of documentation to demonstrate compliance
was a violation of 12 CFR 215.8.
Appeal of a Potential
Violation of the Equal Credit
Opportunity Act: Disparate Treatment on the
Basis of Marital Status - (Third Quarter 2001)
Background
A bank
appealed the OCC's decision that there was reason to believe the
bank had engaged in a pattern or practice of discouraging or denying
credit card applications on the basis of marital status in violation
of the Equal Credit Opportunity Act (ECOA). Specifically, the OCC
concluded that the bank:
Impermissibly
discriminated against credit card applicants on the basis of marital
status:
- By using
the phrase ''Name of Spouse for Joint Applications'' on credit card
pre-approved materials;
- By
permitting only the addressee or the addressee's spouse to accept
the pre-approved credit card account by
telephone;
- By
permitting only the spouse of a deceased credit cardholder to assume
the credit card account without reapplication;
and
- By
permitting only the spouse of a store employee to be a joint
applicant for the store employee credit card.
The bank
appealed the OCC's decision based on the
following:
- Their sole
business is granting credit to all qualified applicants. It defies logic that
management would have taken any action to deny credit or
discourage any applicant for credit.
- It is
incontrovertible as a matter of law that the ECOA and Regulation B
are not applicable to the type of solicitations at issue in this
case.
- The OCC's
position with respect to the bank's handling of deceased accounts
is not only flawed as a matter of law, it evidences an alarming
lack of understanding of the very real issues confronted by a
service organization in trying to deal with the pressing needs of
its customers.
- The House
Account is an employee benefit under federal tax law-not a credit
transaction-and is therefore simply not subject to the
ECOA.
- The OCC has
not identified one instance where any individual was denied
credit, or was discouraged from applying for credit, or even
complained about the bank's solicitation or application practices.
Nor did the OCC
provided any evidence that the matters identified in OCC's letter
constituted a ''pattern or practice.''
Discussion
The ECOA, 15
USC 1691(a), prohibits a creditor from discriminating against an
applicant on a prohibited basis regarding any aspect of a credit
transaction. The
implementing regulation 12 CFR 202.4 (Regulation B) defines
prohibited basis as follows:
Prohibited
basis means race,
color, religion, national origin, sex, marital status, or age
(provided that the applicant has the capacity to enter into a
binding contract); the fact that all or part of the applicant's
income derives from any public assistance program; or the fact that
the applicant has in good faith exercised any right under the
Consumer Credit Protection Act or any state law upon which an
exemption has been granted by the Board. (12 CFR 202.2
(z))
While ECOA
does not define the term ''pattern or practice'' the Interagency
Policy Statement on Discrimination in Lending offers guidance on the
meaning of a pattern or practice. The Policy Statement states
that ''repeated, intentional, regular, usual, deliberate, or
institutionalized practices will almost always constitute a pattern
or practice'' of lending discrimination but ''isolated, unrelated,
or accidental occurrences will not.''
In assessing
whether a pattern or practice exists, the OCC considers the totality
of circumstances, including the following
factors:
- Whether the
conduct appears to be grounded in a written or unwritten policy or
established practice that is discriminatory in purpose or
effect.
- Whether
there is evidence of similar conduct by a bank toward more than
one applicant.
- Whether the
conduct has some common source or cause within the bank's
control.
- The
relationship of the instances of conduct to one
another.
- The
relationship of the number of instances of conduct to the bank's
total lending activity.
This list of
factors is not exhaustive and whether the OCC finds evidence of a
pattern or practice depends on the egregiousness of the facts and
circumstances involved.
Each inquiry is intensively fact-specific and there is no
minimum number of violations that will trigger a finding of a
pattern or practice of discrimination.
Conclusion
1. The use of
the phrase ''Name of Spouse for Joint Applications'' on pre-approved
materials impermissibly discourages unmarried applicants from
applying for credit. The bank has argued that this
practice is not covered under the regulation because it is a
solicitation, and not an application. However, the discussion of
whether the pre-approved materials are applications or solicitations
becomes a moot issue when considering section 202.5-Rules Concerning
Taking of Applications of the Regulation B Commentary: 5(a)
Discouraging applications.
1. Potential
applicants. Generally,
the regulation's protections apply only to persons who have
requested or received an extension of credit. In keeping with the purpose
of the act-to promote the availability of credit on a
nondiscriminatory basis section 202.5(a) covers acts or practices
directed at potential applicants. Practices prohibited by this
section include:
- A statement
that the applicant should not bother to apply, after the applicant
states that he is retired.
- Use of
words, symbols, models, or other forms of communication in
advertising that express, imply, or suggest a discriminatory
preference of a policy of exclusion in violation of the
act.
- Use of
interview scripts that discourage applications on a prohibited
basis.
As noted in
the second bullet point, the use of any forms of communication in
advertising that express, imply, or suggest a discriminatory
preference of exclusion results in a violation of the act. The use of materials that
contain the phrase ''Name of Spouse for Joint Applications'' might
discourage unmarried persons from applying for joint
credit.
As noted in
the third bullet point above, the use of interview scripts that
discourage applications on a prohibitive basis results in a
violation of the act. The practice of permitting
either the addressee of a written pre-approved solicitation or the
addressee's spouse, but no one else, to accept the credit card
account by telephone may impermissibly deny unmarried persons from
accepting the account.
While
sympathetic to issues involving deceased cardholders, the bank's
practice of permitting only the spouse of a deceased cardholder to
assume the account without reapplication may impermissibly deny
unmarried persons from assuming the account.
The provisions
of Regulation B do not exclude credit transaction accounts offered
by employers. The
bank's practice of permitting only the spouse of its employees to be
a joint applicant for the employee credit card may impermissibly
deny unmarried person from applying for the account. Because of the nature of the
violations in this case, it is difficult to identify victims. The lack of identifiable
victims, however, is not inconsistent with a finding by the OCC that
it has reason to believe that the creditor engaged in a pattern or
practice of discouraging or denying applications for credit in
violation of ECOA.
Based on the
above, the ombudsman opined, that at the time of the examination,
there was reason to believe that the bank engaged in a pattern or
practice of discouraging or denying credit card applications on the
basis of marital status.