Special Loan Terms for Employees

Issue/Inquiry

For first lien residential mortgage applications, is it acceptable for the Bank to provide a uniform closing cost credit for all bank employees? 

Response Summary

There is nothing in the Equal Credit Opportunity Act or Fair Housing Act that prohibits the Bank from offering special loan terms to its employees, unless the Bank’s hiring practices are such that loans to its employees amount to discrimination on a prohibited basis. Special loan terms offered to all employees would not violate Regulation O’s prohibition against offering loan terms to Insiders not available to the public.

Response Detail

Special loan terms as a benefit to employees are generally permissible under Regulation B and Regulation O.

Under Regulation B, which implements the Equal Credit Opportunity Act (“ECOA”), the term “prohibited basis” means race, color, religion, national origin, sex, marital status, or age (provided 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 Bureau of Consumer Financial Protection. 12 CFR §1002.2(z).

Similarly, under the Fair Housing Act (46 U.S.C. 3601 et seq.), discrimination is prohibited by housing providers or lenders on the basis of race or color, religion, sex, national origin, familial status, or disability.

To discriminate against an applicant means to treat one applicant less favorably than another on a prohibited basis. 12 CFR 1002.2(n). The general rule covers all dealings without exception between an applicant and a creditor, including the terms of the credit. Whether or not prohibited elsewhere by the regulation, a credit practice that treats applicants differently on a prohibited basis violates the law because it violates the general rule. Official Interpretations, ¶1002.4(a)-1.

The Bank, in offering special loan terms to its employees, would necessarily be discriminating against the public, since it would be treating the public less favorably than its employees, but this would not in itself be on a basis prohibited by the ECOA or the Fair Housing Act.

If the Bank was hiring employees on a basis that would be prohibited – if it was the basis for making its credit decision – an argument could be made that, in offering special terms to its employees, it would in effect be doing so on a prohibited basis, since membership in this class of people benefitting from the special loan terms would be on that basis. If the Bank, however, is following the guidelines of the Equal Employment Opportunity Commission (“EEOC”), and is not discriminating in its hiring practices on the basis of race, color, religion, sex, national origin, disability, or age, then membership in the class of employees would not be on a basis that would be prohibited as a basis for making credit decisions. The EEOC standards complement those of the ECOA and Fair Housing Act. At any rate, the Bank would have Equal Employment Opportunity violations before it would have a Fair Lending claim.

Under Regulation O, a bank cannot extend credit to any Insider of the bank unless the extension of credit is made on substantially the same basis as those prevailing for comparable transactions by the bank with other persons that are not Insiders. An “Insider” is an executive officer, director, or principal shareholder of the bank, or any of their related interests. Nothing in this prohibition, however, prevents an extension of credit made pursuant to a benefit or compensation program widely available to the employees of the bank. 12 CFR §§215.2(h);4(a).

This means that a benefit that can apply only to officers, for example, would be a Regulation O violation, while a benefit that applies to all employees would be one which officers could also participate in, so long as they did not receive terms not available to employees.

In this case, a cost credit to all employees would not be a Regulation O problem, but would be a benefit that could also be provided to officers.

This entry was posted on Tuesday, December 27th, 2016 at 1:34 pm.