Waiving Verification of Employment for Homeowners but not Renters
Bank asks whether it would be considered discriminatory under Regulation B to waive a verification of employment for an applicant who is a homeowner but not for one who is a renter, and whether an applicant in a rent to own or lease to purchase arrangement could be considered a homeowner.
Banks have waived the terms and conditions of loans for as long as there have been banks. Waiving a verification of employment requirement for homeowners but not renters appears neutral on its face, so far as the protections of the Equal Credit Opportunity Act or Regulation B (“ECOA”) are concerned. Assuming that a loan is not covered by the Ability-to-Repay rules of section 1026.43 of Regulation Z for closed-end consumer loans secured by dwellings, what could be wrong with doing so?
In making a determination of whether or not there is discrimination on a prohibited basis, however, the regulators will look not only to overt discrimination, but also to acts or practices which appear to be neutral on their face but have a disproportionately negative effect on protected groups. If there is no legitimate business need being satisfied that could not be achieved as well by means that are less disparate in their effect, they may consider such acts and practices as being in violation of the legal and regulatory requirements. Regulation B, Official Interpretations, 1002.6(a)-2.
The Interagency Task Force on Fair Lending generally applies this standard to all lending acts or practices. 59 Fed. 18,266 (April 15, 1994).
If the proportion of renters is greater among the groups protected by ECOA requirements, a practice which imposes a higher credit standard upon them than upon homeowners might have such a disparate effect.
The bank should also consider the Unfair, Deceptive, or Abusive Acts or Practices (“UDAAP”) requirements of the Dodd-Frank Act. Among other things, UDAAP is concerned with whether an act or practice causes or is likely to cause substantial injury to consumers, the injury is not reasonably avoidable by them, and the injury is not outweighed by any benefits to consumers. “Substantial injury” may be found if there are many relatively slight injuries.
No rulings have come down concerning UDAAP concerning the waiver of a term or condition such as the verification of employment. However, some rulings have touched upon the negative effect of acts or practices on the credit ratings of consumers. By analogy, waiving the verification of employment for one class of applicants (i.e., the homeowners) but not another (i.e., the renters), confers a benefit upon one class but not another which may be reflected in the credit histories of the two groups. The renters would be unable to avoid this comparative disadvantage, since it was done at the discretion of the bank.
As to whether renters under a lease-to-purchase arrangement might be regarded as homeowners, Regulation B does not define the term “homeowner.” With regards obtaining monitoring information, however, it is concerned only with loans to purchase or refinance the principal dwelling of the applicant. 12 CFR 1002.13(a). This indicates that a transfer of full title is contemplated. If to be a homeowner is to have full title to the property, then such renters are not homeowners. They do not have full title but have instead an option to acquire full title. They would have an equitable interest in the property, which may confer upon them certain rights. For example, it may be necessary to provide them with a notice of the right to rescind under Regulation Z. Official Commentary, 1026.2(a)(24)-5. However, they would not be considered homeowners.
Does this mean then that a waiver of verification of employment for homeowners but not for renters is prohibited by the Equal Credit Opportunity Act or UDAAP? Not at all. What it does mean, however, is that such a practice should not be done on an ad hoc basis, where loan officers or others, acting with the best of intentions, may create a pattern which in the eyes of a federal regulator has a discriminatory effect. Rather, such a practice should be established within a formal policy which forbids discrimination on prohibited basis, provides for oversight and monitoring, and which also indicates the business purpose to be achieved and the criteria for such waivers. Moreover, in establishing this policy, the bank should consider the effect it will have upon groups protected by Regulation B or whether such a practice would be considered unfair or abusive under UDAAP.