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.

 

RELATED TERMS
  1. Credit Report

    A credit report is a detailed report of an individual's credit ...
  2. Floor Limit

    A floor limit is a purchase amount over which further authorization ...
  3. Credit Criteria

    Credit criteria describes the factors that lenders use to determine ...
  4. Trade Line

    A trade line is a record of activity for any type of credit extended ...
  5. Credit Watch

    Credit watch refers to a variety of programs offered by credit ...
  6. Consumer Credit File

    A consumer credit file contains data about a consumer’s past ...
Related Articles
  1. Personal Finance

    Which Is More Important: Credit Report or Credit Score?

    Here's the difference between a credit report and credit score, and which is more important.
  2. Personal Finance

    Take the Right Steps to Build Excellent Credit

    There are several things you can do to protect and improve your credit score.
  3. Personal Finance

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  4. Personal Finance

    Monitoring Your Credit? Keep These 5 Things in Mind

    Your credit history is a key financial diary of your life. Here are five things to consider when making sure your credit is healthy.
  5. Personal Finance

    The top 3 credit bureaus

    Learn about the top three credit bureaus: what they do, how they develop your credit score – and why the credit scores they assign you may differ.
  6. Personal Finance

    Analyzing a Career in Credit Analysis

    If you're a number-cruncher and responsibility doesn't scare you, this could be the job for you.
  7. Personal Finance

    Credit Scams To Watch Out For

    More than 30 million people were victims of fraud in 2007. Will you be next?
  8. Personal Finance

    Improve Your Chances of Being Approved for a Mortgage

    Homebuyers should think like lenders and fix their credit profiles before applying for a home loan.
  9. Personal Finance

    How Your Credit Score Compares to the Average American's

    While only a small percentage of Americans have terrible credit scores, a whopping 30% have poor or bad credit, according to the Consumer Financial Protection Bureau.
  10. Personal Finance

    Do You Understand Your Credit Score?

    Most Americans don't really understand their credit scores. Find out what you need to know.
Trading Center