ABA Regulatory and Compliance Inbox: Can We Base Mortgage Credit Decisions on the Assets of the Borrower?

By Leslie Callaway, CRCM, CAFP; Mark Kruhm, CRCM, CAFP; and Rhonda Castaneda, CRCM

Q: My bank made a mortgage loan subject to reporting under the Home Mortgage Disclosure Act. Regulation C (12 CFR 1003), which implements HMDA, requires that it report the income relied upon in making the credit decision. What would my bank report if instead of income it based the credit decision on the assets of the borrower?

A: Per Comment 4 to §4(a)(10)(iii), a bank “does not include as income amounts considered in making a credit decision based on factors that [it]relies on in addition to income, such as amounts derived from underwriting calculations of the potential annuitization or depletion of an applicant’s remaining assets.” Therefore, presuming the bank did not rely on any other income, it would report “NA.”

Q: My bank’s core provider informed us it would no longer generate coupon booklets for residential mortgage loans, as permitted by §1026.41(e)(3) of Regulation Z. Instead of sending periodic statements monthly, as suggested, may the bank print on perforated paper a slip that borrowers may return with their payment? If so, may the bank send these on a quarterly or semiannual basis, or must it provide slips covering an entire year?

A: Yes, the bank may provide such slips for borrowers to return with their payment. Comment 2 to §1026.41(e)(3) states: “A coupon book is a booklet provided to the consumer with a page for each billing cycle during a set period of time (often covering one year). These pages are designed to be torn off and returned to the servicer with a payment for each billing cycle.” It would not appear to matter whether the borrower tears pages from a “booklet” (i.e., pages/slips stacked one on top of another) or a single sheet of paper. Additionally, while the regulation indicates that coupon booklets often cover one year it does not require it.

Q: A credit card customer wishes to upgrade to a different credit card product (for instance, from a basic card to a gold card). May the cardholder keep the same credit card number? If so, may the bank provide a change-in-terms notice or would it require new disclosures under Regulation Z?

A: There is no legal reason that the account number must change. But whether it changes may be a factor in what notices must be provided. Comment 6.i to §1026.5(b)(1)(i) points out:

When a card issuer substitutes or replaces an existing credit card account with another credit card account, the card issuers must either provide notice of the terms of the new account . . . or notice of the changes in the terms of the existing account. . . . Whether a substitution or replacement results in the opening of a new account or a change in the terms of an existing account . . . is determined in light of all the relevant facts and circumstances.

Comment 6.ii.B to that section lists facts and circumstances to consider in the determination, among them providing a new account number. See that comment for additional facts and circumstances to consider. There may be operational or other issues to consider, such as whether a card type requires a separate bank identification number or “BIN.”< Q: My bank is mailing letters to its credit card customers with good payment histories and the “ability to repay,” informing them that the bank is increasing their credit limit. Because the customers did not request an increase, should the letter provide the customer the option of opting out or refusing the increase? 

A: Nothing in Regulation Z prohibits card issuers from automatically increasing a consumer’s credit limit so long as the customer meets the regulation’s “ability to repay” requirement. While there may be benefits to automatic credit limit increases, some consumers may not want a higher limit, to avoid over-spending, for example. Thus, it makes sense for the bank to honor a request not to increase the limit—or to decrease the limit. However, there is no obligation to provide the option in writing to the consumer.

Q: Does Regulation B require banks to have a secondary review before denying a loan? If not required, are there any “best practices” the bank should consider?

A: Regulation B does not require a secondary review of adverse credit decisions. In fact, some adverse decisions are generated with no human intervention. That is not to say a bank may not institute such a process should the bank deem it appropriate, and many banks do. Whether there is a review may depend on the loan type.

In addition, some banks review final adverse decisions and adverse action notices for purposes of assessing bank compliance with Regulation B’s technical and substantive requirements (such as fair lending).

The technical review ensures the notice was completed correctly. The fair lending review or file comparison analyzes whether the loan might have been made with certain adjustments or whether another lender might have made the loan using different objective criteria. The goal of this review is to reduce the risk of disparate treatment.

Answers are provided by ABA Regulatory Policy and Compliance team members Leslie T. Callaway, CRCM, CAFP, senior director, compliance outreach and development; Mark Kruhm, CRCM, CAFP, senior compliance analyst; and Rhonda Castaneda, CRCM, senior compliance analyst. Answers do not provide, nor are they substitutes for, professional legal advice. Answers are current as of September 2021.