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Credit Discrimination: 6.5.3.3 Avoiding a Spouse’s Bad Credit History

On the applicant’s request, the creditor must consider any information that the applicant presents “that tends to indicate” that the credit history being considered by the creditor does not accurately reflect the applicant’s creditworthiness.259 The creditor has no affirmative duty to request this information; the burden is placed on the applicant to explain why the applicant should not be denied credit because, for example, a poor credit rating is attributable to the conduct of an ex-spouse during the marriage.

Credit Discrimination: 6.5.4 Telephone Listing

A creditor may not consider whether there is a telephone listing in the applicant’s name as a factor relevant to creditworthiness; but it may consider the existence of a telephone at the applicant’s residence as such a factor.265 This provision was primarily designed to protect married women, who may not have had telephone listings in their own names.

Credit Discrimination: 6.5.5 Likelihood of Bearing or Rearing Children

In evaluating an applicant’s creditworthiness, a creditor may not make assumptions or use aggregate statistics concerning the likelihood that the income of any group of persons will be interrupted or diminished at a future time because those persons will bear or rear children.266 In addition, creditors are forbidden from denying loans to women who anticipate taking maternity leaves.267 Read together with the provision of Regulation B,268 which bars

Credit Discrimination: 6.2.2.5 Requirements for Immediate Payment

One form of discrimination that is not obvious is the refusal to allow a customer to delay payment until some time after the goods or services have been delivered. For example, various tradespeople, doctors, or merchants, while not formally offering credit, will allow certain customers to mail in their payments later while requiring immediate payment up-front from other customers.

Credit Discrimination: 6.3.1 Introduction to the Three Types of Credit Evaluation Systems

In order to understand discrimination in the credit evaluation process, it is essential to understand the different systems used for credit evaluation and how these systems operate. There are basically three types of credit evaluation systems used by creditors: (1) credit scoring systems, (2) judgmental systems, or (3) combined systems that share aspects of both of the other two systems.

Credit Discrimination: 6.3.2.1 Description of Credit Scoring

A credit scoring system is one that numerically weighs or “scores” some or all of the factors considered in the underwriting process. There has been an explosive growth in the use of credit scoring systems over the last two decades, and this growth has been accompanied by some controversy.

Credit Discrimination: 6.3.2.2 Regulation B Definition of Credit Scoring

Regulation B includes a definition of “credit scoring system,” which is described under the regulation as “an empirically derived, demonstrably and statistically sound, credit scoring system.”45 However, Regulation B makes limited use of this definition, referring to it only with respect to when creditors are permitted to consider information about age and public assistance status.46 The Fair Credit Reporting Act contains a definition of “credit score” that is different from that found under Regulat

Credit Discrimination: 6.3.3 Judgmental Systems

A judgmental system is defined by Regulation B as any credit evaluation system other than a “demonstrably and statistically sound, empirically derived credit system”—that is, a system other than a credit scoring system.59 A judgmental system generally involves a subjective examination of the overall application; often, this involves a general search of the application for characteristics that are “acceptable” to the creditor based on past experience.

Credit Discrimination: 6.3.4 Combination Systems

Regulation B allows combination systems of credit evaluation—that is, systems that require applicants to pass both a credit scoring and judgmental evaluation. In this fashion, any credit scoring system may be transformed into a combination system whenever an applicant obtains a passing score but is still considered an undesirable applicant by the creditor. Automated underwriting systems for mortgage loans often have cut-offs for automatic approvals and then a middle category for applicants who do not get an automatic approval but for whom an additional, ad hoc analysis is done.

Credit Discrimination: 6.3.5 Different Requirements for Credit Scoring and Judgmental Systems

Despite the fact that Regulation B goes to some length to define credit scoring systems, judgmental systems, and combination systems, the requirements for the two main types of systems are not significantly different. The only provisions of the regulation that differ depending on whether the creditor uses a credit scoring or a judgmental system are those concerning the consideration of age and public assistance in credit evaluation.

Credit Discrimination: 6.6.1 Introduction

In certain special situations, creditors may make credit decisions taking into consideration three of the prohibited bases: the applicant’s age, public assistance status, and marital status. These three prohibited bases are not found in other federal discrimination laws, and thus the Equal Credit Opportunity Act (ECOA) limitations on these bases may be determinative.

Credit Discrimination: 6.6.2.1 Introduction

Although age is a prohibited basis for discrimination under the ECOA, age is a very different type of prohibited basis than, for example, race or religion. Many types of age discrimination are explicitly authorized under the ECOA, and the ECOA can be seen more as regulating age discrimination than as prohibiting it.

Credit Discrimination: 6.6.2.2 General Exceptions to the Prohibition Against Age Discrimination

The first general exception to the rule against age discrimination—which applies to both credit scoring and judgmental systems—is that the creditor can consider the applicant’s age to determine if the applicant has the legal capacity to enter into a binding contract.271 Legal capacity refers primarily to the legal age of majority. That is, if under state law an applicant is too young to enter into a binding contract, the creditor may reject the application on that basis.

Credit Discrimination: 6.6.2.3 Relationship to State Laws

State laws addressing credit discrimination are preempted to the extent that they are inconsistent with the ECOA and Regulation B.275 As described below, Regulation B allows credit discrimination in favor of older applicants. Regulation B, in order to favor an older applicant, specifically preempts state laws that prohibit creditors from asking or considering an applicant’s age.276

Credit Discrimination: 6.6.2.6 Combination Systems

The official interpretations of Regulation B authorize a credit evaluation process that combines a credit scoring system and a judgmental system.297 The credit scoring component of the combination system must comply with the special requirements (concerning age and public assistance evaluations) of a credit scoring system.

Credit Discrimination: 6.6.3.1 General Rule Against Evaluations Based on Public Assistance Status

A creditor may not consider whether an applicant’s income is derived from any public assistance program, except as expressly permitted by Regulation B.299 Credit scoring systems cannot consider the fact that income derives from a public assistance program because Regulation B contains no provision allowing the creditor using a credit scoring system to consider the applicant’s public assistance status.300 Income derived from public assistance programs should not be assigned a negative score in co

Credit Discrimination: 6.6.3.2 Exception for Judgmental System

When the creditor uses a judgmental system, it may consider whether the applicant’s income is derived from a public assistance program, but only to determine a “pertinent element of creditworthiness.”303 According to Regulation B, a pertinent element of creditworthiness is “any information about applicants that a creditor obtains and considers and that has a demonstrable relationship to a determination of creditworthiness.”304

Credit Discrimination: 6.4.2.1 Overview

If even a single factor in a credit scoring model correlates to race or other prohibited bases, the results of the model may be discriminatory.102 The official interpretations appear to concur, noting that an “empirically derived, demonstrably and statistically sound” credit scoring system may be flawed and thus subject to review and challenge under the Equal Credit Opportunity Act (ECOA).103 These concerns are intensified by the “black box” nature of credit scoring systems.