The ombudsman received a formal appeal concerning several violations of 12 USC 375 (b)-Extension of Credit to Executive Officers, Directors, and Principal Shareholders of Member Banks.

Background

Bank management and the board believed that several violations of the implementing regulation 12 CFR 215 (Regulation O) was subjective in nature and should not be included in the ROE. Specifically, they disagreed with the violations citing preferential terms on loans to insiders. Bank management believed that several items cited as violations of Regulation O/Insider Loans were based on subjective judgment and should not be included as ''violations of law'' in the ROE. Management believed the violations of law that were cited in the ROE were either technical in nature or based on a subjective standard that bank management disagreed with in each case. The bank stated they have never given preference to directors or principal shareholders on credit facilities.

The ROE identified eight violations of Regulation O where extensions of credit were granted on favorable terms. These included pricing, waiving of fees, and policy exceptions for a borrower's equity in real property. The ROE comments further explained that these violations were technical because management could not provide transactions considered comparable by the OCC.

Discussion

Regulation O, 12 CFR 215-Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks, section 215.4(a)(1)(i), states:

(1) No member bank may extend credit to any insider of a bank or insider of its affiliates unless the extension of credit:

(i) Is made on substantially the same terms (including interest rates and collateral) as, and following credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions by the bank with other persons that are not covered by this part and who are not employed by the bank; and

(ii) Does not involve more than the normal risk of repayment or present unfavorable features.

The ROE criticized bank management for failing to provide comparable transactions to the insider loans cited for preferential terms. The ombudsman's review revealed that some of the loans provided as comparable transactions were similar to the insider loans, but there were nuances that differentiated the transactions and created questions regarding their comparability. Additionally, the review of the applicable loan profitability worksheets found that they did not include all aspects of the customer's relationship with the bank. In some instances, the deposit relationship was the factor that lent support to the terms given to the insiders but it was not included in the profitability worksheet.

Conclusion

The ROE specifically concluded that the lack of comparable transactions was a technical violation because ''the applicable insiders do have substantial net worth and liquidity and may warrant 'best borrower' rates.'' This description is more reflective of a violation of 12 CFR 215.8 (a), which states:

(A) In general. Each member bank shall maintain records necessary for compliance with the requirements of this part.

Based on the comments in the ROE and the information provided by bank management, the ombudsman concluded that the preferential treatment violation cited in the ROE was not appropriate. However, bank management's inadequate documentation did not clearly demonstrate compliance with the prohibition against preferential lending to insiders. Therefore the ombudsman concluded that the lack of documentation to demonstrate compliance was a violation of 12 CFR 215.8.

Appeal of a Potential Violation of the Equal Credit Opportunity Act: Disparate Treatment on the Basis of Marital Status - (Third Quarter 2001)

Background

A bank appealed the OCC's decision that there was reason to believe the bank had engaged in a pattern or practice of discouraging or denying credit card applications on the basis of marital status in violation of the Equal Credit Opportunity Act (ECOA). Specifically, the OCC concluded that the bank:

Impermissibly discriminated against credit card applicants on the basis of marital status:

1. By using the phrase ''Name of Spouse for Joint Applications'' on credit card pre-approved materials;
2. By permitting only the addressee or the addressee's spouse to accept the pre-approved credit card account by telephone;
3. By permitting only the spouse of a deceased credit cardholder to assume the credit card account without reapplication; and
4. By permitting only the spouse of a store employee to be a joint applicant for the store employee credit card.

The bank appealed the OCC's decision based on the following:

• Their sole business is granting credit to all qualified applicants. It defies logic that management would have taken any action to deny credit or discourage any applicant for credit.
• It is incontrovertible as a matter of law that the ECOA and Regulation B are not applicable to the type of solicitations at issue in this case.
• The OCC's position with respect to the bank's handling of deceased accounts is not only flawed as a matter of law, it evidences an alarming lack of understanding of the very real issues confronted by a service organization in trying to deal with the pressing needs of its customers.
• The House Account is an employee benefit under federal tax law-not a credit transaction-and is therefore simply not subject to the ECOA.
• The OCC has not identified one instance where any individual was denied credit, or was discouraged from applying for credit, or even complained about the bank's solicitation or application practices. Nor did the OCC provided any evidence that the matters identified in OCC's letter constituted a ''pattern or practice.''

Discussion

The ECOA, 15 USC 1691(a), prohibits a creditor from discriminating against an applicant on a prohibited basis regarding any aspect of a credit transaction. The implementing regulation 12 CFR 202.4 (Regulation B) defines prohibited basis as follows:

Prohibited basis means race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); 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 state law upon which an exemption has been granted by the Board. (12 CFR 202.2 (z))

While ECOA does not define the term ''pattern or practice'' the Interagency Policy Statement on Discrimination in Lending offers guidance on the meaning of a pattern or practice. The Policy Statement states that ''repeated, intentional, regular, usual, deliberate, or institutionalized practices will almost always constitute a pattern or practice'' of lending discrimination but ''isolated, unrelated, or accidental occurrences will not.''

In assessing whether a pattern or practice exists, the OCC considers the totality of circumstances, including the following factors:

• Whether the conduct appears to be grounded in a written or unwritten policy or established practice that is discriminatory in purpose or effect.
• Whether there is evidence of similar conduct by a bank toward more than one applicant.
• Whether the conduct has some common source or cause within the bank's control.
• The relationship of the instances of conduct to one another.
• The relationship of the number of instances of conduct to the bank's total lending activity.

This list of factors is not exhaustive and whether the OCC finds evidence of a pattern or practice depends on the egregiousness of the facts and circumstances involved. Each inquiry is intensively fact-specific and there is no minimum number of violations that will trigger a finding of a pattern or practice of discrimination.

Conclusion

The use of the phrase ''Name of Spouse for Joint Applications'' on pre-approved materials impermissibly discourages unmarried applicants from applying for credit. The bank has argued that this practice is not covered under the regulation because it is a solicitation, and not an application. However, the discussion of whether the pre-approved materials are applications or solicitations becomes a moot issue when considering section 202.5-Rules Concerning Taking of Applications of the Regulation B Commentary: 5(a) Discouraging applications.

Potential applicants. Generally, the regulation's protections apply only to persons who have requested or received an extension of credit. In keeping with the purpose of the act-to promote the availability of credit on a nondiscriminatory basis section 202.5(a) covers acts or practices directed at potential applicants. Practices prohibited by this section include:

• A statement that the applicant should not bother to apply, after the applicant states that he is retired.
• Use of words, symbols, models, or other forms of communication in advertising that express, imply, or suggest a discriminatory preference of a policy of exclusion in violation of the act.
• Use of interview scripts that discourage applications on a prohibited basis.

As noted in the second bullet point, the use of any forms of communication in advertising that express, imply, or suggest a discriminatory preference of exclusion results in a violation of the act. The use of materials that contain the phrase ''Name of Spouse for Joint Applications'' might discourage unmarried persons from applying for joint credit.

As noted in the third bullet point above, the use of interview scripts that discourage applications on a prohibitive basis results in a violation of the act. The practice of permitting either the addressee of a written pre-approved solicitation or the addressee's spouse, but no one else, to accept the credit card account by telephone may impermissibly deny unmarried persons from accepting the account.

While sympathetic to issues involving deceased cardholders, the bank's practice of permitting only the spouse of a deceased cardholder to assume the account without reapplication may impermissibly deny unmarried persons from assuming the account.

The provisions of Regulation B do not exclude credit transaction accounts offered by employers. The bank's practice of permitting only the spouse of its employees to be a joint applicant for the employee credit card may impermissibly deny unmarried person from applying for the account. Because of the nature of the violations in this case, it is difficult to identify victims. The lack of identifiable victims, however, is not inconsistent with a finding by the OCC that it has reason to believe that the creditor engaged in a pattern or practice of discouraging or denying applications for credit in violation of ECOA.

Based on the above, the ombudsman opined, that at the time of the examination, there was reason to believe that the bank engaged in a pattern or practice of discouraging or denying credit card applications on the basis of marital status.