Regulation B

What is 'Regulation B'

Regulation B is a regulation intended to prevent applicants from being discriminated against in any aspect of a credit transaction. Regulation B outlines the rules that lenders must adhere to when obtaining and processing credit information. Lenders are prohibited from discrimination on the basis of age, gender, ethnicity, nationality, or marital status.

BREAKING DOWN 'Regulation B'

All lenders are required to comply with Regulation B when extending credit to borrowers. Regulation B implements the Equal Credit Opportunity Act (ECOA) which is regulated and enforced by the Consumer Financial Protection Bureau (CFPB). The ECOA was implemented to ensure that financial institutions and firms that deal with credit extension make credit equally available to all creditworthy customers. This means that any feature that does not have to with consumer credit cannot be used to evaluate whether a client gets approved for a loan. Regulation B covers the actions of a creditor before, during, and after a credit transaction. The CFPB lists credit transactions and aspects of credit transactions to include consumer credit; business credit; mortgage; open-end credit; refinancing; credit applications; information requirement; standards of creditworthiness; investigation procedures; and revocation or termination of credit.

When it comes to credit transactions, a creditor cannot discriminate:

  1. On the basis of the applicant’s race, marital status, nationality, gender, age, or religion
  2. An applicant whose income is derived from a public assistance program
  3. An applicant who, in good faith, exercised his or her rights under the Consumer Credit Protection Act

Under Regulation B, while a lender may not request information about an applicant’s sex, national origin, color, etc., there are certain times when such information may be collected from the applicant. For example, an applicant who puts down his home as collateral will have such information collected from him for monitoring compliance. Also, an applicant’s age may be requested if it appears that he or she does not have the capacity to contract. The number of children, their ages, and the borrower’s financial obligations relating to the children is information that may be collected by creditors. Marital status is also required if the applicant resides in a community property state.

Spousal Information

A creditor may only request information from a loan applicant’s spouse if:

  1. The spouse will be permitted to use the account
  2. The spouse will be contractually liable on the account;
  3. The applicant is relying on the spouse's income as a basis for repayment of the credit requested;
  4. The applicant resides in a community property state or is relying on property located in such a state as a basis for repayment of the credit requested; or
  5. The applicant is relying on alimony, child support, or separate maintenance payments from a spouse or former spouse as a basis for repayment of the credit requested.

Regulation B mandates that lenders provide an oral or written notice of rejection to failed applicants within 30 days of receiving their completed application. The notice must explain why the applicant was rejected, or else give instructions for how the applicant can request this information. The spouses of married applicants who are rejected also have the same right to this information. The information provided to an applicant for why he was rejected helps him or her to take constructive steps to build his credit to an acceptable level or to correct erroneous information that was used by the creditor in evaluating the applicant’s creditworthiness.

Creditors that fail to comply with Regulation B will be held liable for punitive damages up to $10,000 in individual actions. For class actions, the creditor could be dealt a penalty of the lesser of $500,000 or 1% of the creditor’s net worth.