Consumer Compliance Outlook: Fourth Quarter 2008

Regulation B and Marital Status Discrimination: Are You in Compliance?

Boards of directors and their senior management strive to develop strong programs for managing compliance risk to shield their institutions from the legal and reputational risks associated with fair lending violations. While most institutions are successful at maintaining compliance with federal fair lending laws, some struggle with finding ways to protect themselves from the fair lending risk of marital status discrimination. Marital status discrimination is one of the most challenging forms of discrimination to understand and one of the most often cited violations of Regulation B, the implementing regulation for the Equal Credit Opportunity Act. Understanding the marital status provisions in Regulation B can help institutions avoid violations and ensure that their customers are treated fairly and responsibly.

Some of the more common fair lending violations related to marital status occur in the following areas:

  1. improperly requiring spousal signatures on loan documents;
  2. failing to establish the intent to apply for joint credit;
  3. improperly limiting additional parties to spouses; and
  4. improperly taking marital status into account during underwriting.

To help lenders maintain compliance with Regulation B, this article clarifies these issues.

Spousal Signatures

Section 202.7(d) External Link of Regulation B generally provides that a creditor shall not require the signature of an applicant's spouse who is not a joint applicant on any credit instrument if the applicant qualifies on his or her own, unless certain specified exceptions are met:

  • when the spouse's signature is necessary as a matter of state law to provide a secured creditor access to collateral in the event of default, or to give an unsecured creditor access to property otherwise relied upon in the event of death or default; or
  • when the spouse is providing credit support because the primary applicant does not meet the creditor's lending standards (but, as discussed below, when an additional party is needed, a creditor may not require that it be a spouse).

For example, regarding secured credit, a creditor may require spousal signatures on any instrument reasonably believed to be necessary under applicable state law to ensure access to the property in the event of default.1 Accordingly, if obtaining a spouse's signature on a mortgage or other security instrument is sufficient under state law, a lender may not require the spouse to sign the note.2 Additionally, if a creditor determines that a spousal signature is required by state law on an instrument that imposes personal liability, the determination should be supported with a careful legal analysis.3

Similar standards apply for unsecured credit.4 Section 202.7(d)(2) of Regulation B provides that “[i]f an applicant requests unsecured credit and relies in part upon property that the applicant owns jointly with another person to satisfy the creditor's standards of creditworthiness, the creditor may require the signature of the other person only on the instrument(s) necessary, or reasonably believed by the creditor to be necessary, under the law of the state in which the property is located, to enable the creditor to reach the property being relied upon in the event of the death or default of the applicant.”

In the case of a loan to a business, a lender may require the personal guarantees of the partners, directors, or officers of a business and the shareholders of a closely held corporation, but the requirement for a guarantee must be based on the guarantor's relationship to the business, not on a prohibited basis.5 A lender may not require the signature of a guarantor's spouse, unless one of the exceptions in §202.7(d) is met.6

Establishing Joint Intent

Creditors should obtain evidence of an applicant's intent to apply for joint credit at the time of application and should not assume that an applicant intends to apply jointly with a spouse. The Official Staff Commentary for Regulation B provides guidance on proper documentation of a borrower's intent to be a joint applicant:

A person's intent to be a joint applicant must be evidenced at the time of application. Signatures on a promissory note may not be used to show intent to apply for joint credit. On the other hand, signatures or initials on a credit application affirming applicants' intent to apply for joint credit may be used to establish intent to apply for joint credit. The method used to establish intent must be distinct from the means used by individuals to affirm the accuracy of information. For example, signatures on a joint financial statement affirming the veracity of information are not sufficient to establish intent to apply for joint credit.7

Banks may reference or adopt the model forms provided in Appendix B to Regulation B to meet the regulation's requirements for documenting borrower intent. Lenders are cautioned to ensure that these forms are properly completed to show intent. Examiners sometimes find instances in which the box indicating joint intent was not checked, but both spouses had signed the application. In that circumstance, the bank may be directed to contact all affected borrowers to determine if they, in fact, intended to apply for joint credit.

Standards for Additional Parties

Section 202.7(d)(5) of Regulation B provides that if an applicant does not qualify for individual credit, the bank may require an additional party, such as a co-signer, co-applicant, or guarantor, but may not require that the additional party be the applicant's spouse.8 Examiners sometimes find violations of this provision. For example, in one instance, examiners determined that loan officers permitted an applicant to have only a spouse as a co-applicant on unsecured consumer loans. Limiting co-applicants to spouses was not required by bank policy, but loan officers imposed this requirement because they did not understand Regulation B. This practice violated §202.7(d)(5). The practice also resulted in nonmarried applicants being treated less favorably than married applicants, in violation of §202.4(a) of Regulation B.

Underwriting

Section 202.6(b)(8) External Link of Regulation B strictly prohibits banks from treating applicants differently based on marital status:

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.

To ensure compliance with this provision, banks should review underwriting policies and monitor policy exceptions. In one examination, a bank's underwriting of consumer loan applications from married joint applicants differed from its underwriting of unmarried joint applicants. The bank's policy required that joint applicants each meet minimum income and debt-to-income requirements. However, when married applicants applied and failed to meet these requirements, the bank routinely granted exceptions to its policy. In these cases, the loan officers would combine the incomes of the married joint applicants and re-evaluate the application to meet the bank's income and debt-to-income requirements. But the bank did not make exceptions for unmarried co-applicants. The practice of granting underwriting exceptions only for married co-applicants resulted in different standards being applied to joint applicants based on marital status in violation of Regulation B.

Getting It Right

As the saying goes, “An ounce of prevention is worth a pound of cure.” The same logic applies to avoiding marital status violations. Understanding the details of Regulation B will ensure that banks effectively manage fair lending compliance risk. Lenders should conduct a comprehensive fair lending risk assessment to identify any vulnerabilities in areas in which marital status discrimination could occur. For example, lenders should be especially careful with products for which previous violations have been noted. Lenders should also ensure that all loan officers receive regular training in Regulation B, especially when they move into new product areas. Federal Reserve examiners note that most signature violations are found in commercial or agricultural loans. As a result, banks with large portfolios of such loans should be aware of the fair lending risk associated with those products.

Lenders are also encouraged to implement a compliance process to ensure that the appropriate protocols are being followed. Senior management should periodically assess policies and procedures to ensure that they are properly mitigating fair lending risks at the institution. Effective practices include secondary compliance reviews, strong fair lending training programs, regular internal audits, and clear, unambiguous policies that comply with Regulation B. A comprehensive discussion of all aspects of compliance with these matters is beyond the scope of this article. Specific issues and questions should be raised with the consumer compliance contact at your Reserve Bank or with your primary regulator.

  • 1 Specifically, §202.7(d)(4) provides that “[i]f an applicant requests secured credit, a creditor may require the signature of the applicant's spouse or other person on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the property being offered as security available to satisfy the debt in the event of default . . . .”
  • 2 The Official Staff Commentary on Regulation B cautions that a creditor “may not require the spouse to sign the note evidencing the credit obligation if signing only the mortgage or other security agreement is sufficient to make the property available to satisfy the debt in the event of default.” Supplement I to Regulation B, Comment 202.7(d)(4)-1 External Link.
  • 3 See Comment 202.7(d)(4)-2: “A creditor's reasonable belief that, to ensure access to the property, the spouse's signature is needed on an instrument that imposes personal liability should be supported by a thorough review of pertinent statutory and decisional law or an opinion of the state attorney general.”
  • 4 For detailed guidance regarding community property states, see §202.7(d)(3).
  • 5 Comment 202.7(d)(6)-1.
  • 6 Comment 202.7(d)(6)-2.
  • 7 Comment 202.7(d)(1)-3 (internal citations omitted).
  • 8 §202.7(d)(5).