What Is Regulation B (Reg B)?
Regulation B is intended to prevent applicants from being discriminated against in any aspect of a credit transaction. Reg B outlines the rules that lenders must adhere to when obtaining and processing credit information.
The regulation prohibits lenders from discriminating based on age, gender, ethnicity, nationality, or marital status.
- All lenders are required to comply with Regulation B, which protects applicants from discrimination.
- Reg B mandates that lenders provide explanations to rejected applicants within 30 days of receiving their completed applications.
- Creditors that fail to comply with Regulation B are subject to punitive damages.
Understanding Regulation B (Reg B)
All lenders are required to comply with Regulation B when extending credit to borrowers. Reg B implements the Equal Credit Opportunity Act (ECOA), which is regulated and enforced by the Consumer Financial Protection Bureau (CFPB). Congress enacted the ECOA to ensure that financial institutions and firms dealing with credit make it equally available to all creditworthy customers. That means any feature that is not related to consumer credit cannot be used when making loan approval decisions.
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, and open-end credit. This list also includes refinancing, credit applications, information requirements, standards of creditworthiness, investigation procedures, and revocation or termination of credit.
Creditors that fail to comply with Reg B will be held liable for punitive damages up to $10,000 in individual actions. For class actions, the creditor could face a penalty of $500,000 or 1% of the creditor’s net worth, whichever is lower.
Reg B and Discrimination in Lending
When it comes to credit transactions, a creditor cannot discriminate:
- Based on the applicant's race, marital status, nationality, gender, age, or religion
- Against an applicant whose income comes from a public assistance program
- Against an applicant who, in good faith, exercised his or her rights under the Consumer Credit Protection Act
Regulation B also mandates that lenders provide oral or written notice of rejection to failed applicants within 30 days of receiving their completed applications. The notice must explain why the applicant was rejected or give instructions for how the applicant can request this information. The spouses of rejected married applicants also have the right to this information.
The information provided to applicants about the rejection helps them take constructive steps to build their credit. More importantly, it gives applicants the chance to correct the creditor's mistakes in evaluating the applicant's creditworthiness.
Reg B and Requests for Information
Under Regulation B, a lender may not request information about an applicant’s sex, national origin, color, or other information not related to creditworthiness. However, there are certain times when such information can be collected from the applicant. For example, an applicant who puts down his home as collateral will have additional information collected for monitoring compliance.
Furthermore, an applicant's age can be requested if it appears that they cannot legally sign a contract. Creditors can ask about the number of children, their ages, and the borrower's financial obligations relating to the children. Marital status is also required if the applicant resides in a community property state.
A creditor may only request information from a loan applicant’s spouse if:
- The spouse will be permitted to use the account
- The spouse will be contractually liable on the account
- The applicant is relying on the spouse's income as a basis for repayment of the credit requested
- The applicant resides in a community property state or relies on property located in such a state as a basis for repayment of the credit requested
- The applicant relies on alimony, child support, or separate maintenance payments from a spouse or former spouse as a basis for repayment of the credit requested
Benefits of Regulation B
The most important benefit of Regulation B is that it helps to prevent discrimination against women and minorities. Regulation B's prohibition of advertising that would discourage potential applicants from applying for loans is a crucial part of redlining cases. Redlining is an unethical and illegal practice that denies loans or services to people living in majority-minority communities.
Reg B also helps anyone who is denied credit by requiring lenders to give them an explanation. Errors in credit reports are fairly common, and many people only find out about them after being denied credit. Without Regulation B's explanation requirement, many potential borrowers with errors in their credit reports would become discouraged and give up. Once people know the reason for the denial, there is a strong incentive to correct the credit reports and reapply.
Redlining had often been used to discriminate against Black Americans.
Is Reg B Part of Fair Lending?
Yes. Regulation B of the Equal Credit Opportunity Act (ECOA) describes lending acts and practices that are specifically prohibited, permitted, or required. for fair lending practices.
Who Is Subject to Regulation B?
Regulation B applies to all persons who, in the ordinary course of business, regularly participate in the credit decision of an applicant or borrower, including setting the terms of the credit.
What Are the Prohibited Bases of Reg B?
Prohibited basis under Regulation B refers to a borrower's race, color, religion, national origin, sex, marital status, or age. Also included may be 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 related state law. As such, lenders cannot discriminate based on any of the above factors.
The Bottom Line
Regulation B of the Equal Credit Opportunity Act prohibits lenders from using ascribed characteristics of a borrower, such as their age, gender, race, ethnicity, or religion, when making credit or loan decision. Prior to Reg B, discriminatory lending practices such as redlining for mortgages was prevalent in the U.S. Regulation B makes such practices illegal.