Reg B, ECOA, and Fair Lending Foundations

Fair lending sits at the heart of bank compliance, and the exam weights it heavily. The Equal Credit Opportunity Act, at fifteen U-S-C sixteen ninety-one, and Regulation B at twelve C-F-R part ten-oh-two, prohibit discrimination in any credit transaction. Note that word any: Reg B covers consumer and commercial credit, mortgages, auto loans, credit cards, and business loans alike.

It governs every stage of the process, from how you advertise and take applications, to how you evaluate, price, and service credit. When you see a question about how a borrower was treated during a credit decision, ECOA and Reg B are almost always in play.

Memorize the prohibited bases, because the exam tests them directly. Under ECOA, a creditor may not discriminate on the basis of race, color, religion, national origin, sex, marital status, or age, provided the applicant has the capacity to contract. It also protects applicants who receive income from public assistance, and applicants who in good faith exercised a right under the Consumer Credit Protection Act.

The Fair Housing Act, which we'll cover separately, adds familial status and disability for housing-related credit. Keep the two lists distinct: ECOA's bases and Fair Housing's bases overlap but aren't identical, and a sharp question will hinge on which statute supplies a particular protected class.

The exam wants you to distinguish two theories of discrimination. Disparate treatment means treating an applicant differently because of a prohibited basis, whether overtly, like a stated policy, or comparatively, where similar applicants of different groups were treated differently. Disparate impact is subtler: a facially neutral policy that's applied evenly but produces a disproportionately adverse effect on a protected group, and that isn't justified by business necessity.

Both are fair-lending violations. When a question describes a policy that sounds neutral, minimum loan amounts, geographic limits, but lands harder on a protected class, you're looking at potential disparate impact. When it describes two similar applicants treated differently, that's disparate treatment.

There's a third concept regulators sometimes name separately: overt discrimination, an openly stated discriminatory policy, which is really the starkest form of disparate treatment. The practical exam skill is to read a scenario and classify it: is the creditor treating people differently because of a protected basis, or applying a neutral rule that produces a discriminatory effect? Naming the theory correctly often points straight at the right answer.

A workhorse Reg B requirement is the adverse-action notice. When a creditor denies credit, or takes other adverse action on an application, it must generally notify the applicant within thirty days of receiving a completed application. The notice must state the specific reasons for the action, or tell the applicant how to obtain them.

In practice banks combine this with the Fair Credit Reporting Act notice when a credit report was used. Watch the timing variations: there are separate rules for incomplete applications and for counteroffers. The exam loves to give you an application date and an action date and ask whether the bank notified in time and with the right content.

A few more Reg B rules the exam favors. Under the valuations rule, for first-lien loans on a dwelling, the creditor must provide the applicant a copy of each appraisal or written valuation promptly upon completion, or three business days before consummation, whichever is earlier. There are strict limits on when you can require a spouse's signature; you generally can't demand a co-signer based on marital status if the applicant independently qualifies.

Reg B also requires collecting monitoring information, like government monitoring data, for certain dwelling-secured loans. And the rule prohibits discouraging applicants, so even a loan officer's offhand comment steering someone away can be a violation. These overlap with the Home Mortgage Disclosure Act, coming up later.

One more practical point examiners watch closely: how a creditor treats applicants at the inquiry and pre-application stage. Steering a prospective borrower toward a less favorable product, or discouraging them from applying at all, based on a prohibited basis, is a fair-lending violation even though no formal application was ever taken. So fair lending isn't only about the decision; it's about the entire arc from first contact through servicing.

Train yourself to scan the whole interaction, not just the credit decision.

Let's recap fair lending's foundation. ECOA and Reg B, at twelve C-F-R ten-oh-two, ban discrimination across all credit. Know the prohibited bases by heart, and keep ECOA's list distinct from Fair Housing's.

Recognize disparate treatment versus disparate impact in a fact pattern. And nail the adverse-action notice: generally thirty days, with specific reasons. This material recurs throughout the exam and inside the compliance-management domain, so it's worth over-learning.

Test yourself, then we'll cover flood insurance, an area with bright-line rules examiners love.