Regulation B and Extending Credit to Spouses
Written by: André B. Cotten, Regulatory Compliance Counsel, NAFCU
Hello, Compliance Friends! My how time flies when you're having fun, it's already mid-May 2018. The compliance team recently received some questions exploring some Regulation B nuances related to extending credit to spouses. The first portion of this blog highlights when its appropriate to furnish credit information related to spouses, and the latter portion of the blog discusses fair lending guidance related to spouses in community property states.
Joint Applicant Spouses and Credit Furnishing
According to a 2012 issue of the Philadelphia Federal Reserve's Consumer Compliance Outlook, Section 1002.10 lists three obligations for credit unions furnishing consumer credit information to the CRAs. First, a credit union must designate accounts to reflect both spouses' participation in the following circumstances: for new accounts when the spouse is an authorized user or is liable on the account (except as a guarantor, surety, endorser, or similar party); and for existing accounts when one of the spouses makes written request to reflect both spouses' participation on the account. In the latter situation, the credit union must make the designation within 90 days after receiving the written request.
Regulation B also states that when an account is designated to reflect the participation of both spouses, the information must be furnished to the CRAs in a way that enables the CRAs to provide access to the information in the name of each spouse.
Lastly, when a credit union receives an inquiry about an account that reflects the participation of both spouses, the credit union must furnish the information in the name of the spouse for whom the request is made. For example, if the inquiry concerns an account on which a husband and wife both participate, and the inquiry specifically is about the husband, the creditor must provide the information in the husband's name.
Joint Applicant Spouses and Community Property States
Under Regulation B, the general rule is that a credit union "may not request any information concerning the spouse or former spouse of an applicant." However, there are some inquiries deemed permissible under the rule. For example, section 1002.5(c)(2)(iv), permits a credit union to ask for information about an applicant's spouse if the applicant resides in a community property state or is relying on property located in a community property state as a basis for repayment of the requested loan.
While this particular provision does not have any staff commentary that helps clarify the rule, oftentimes the purpose of collecting spousal information in community property states is related to the credit union's ability to collect on the loan. Generally, a credit union should discuss community property issues with local counsel as they are primarily driven by state law. Community property is a marital property regime under which most property acquired during the marriage is owned jointly by both spouses and divided upon divorce, annulment, or death. There are currently nine community property states.
Moreover, Regulation B also prohibits a credit union from requiring the signature “of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested.” However, Regulation B, section 1002.7(d), allows the credit union to obtain a spouse's signature on a security instrument if it is necessary to make community property available to satisfy the loan in the event of default. Please see the relevant excerpt from section 1002.7(d):
“(d) Signature of spouse or other person —
[. . .]
(3) Unsecured credit—community property states. If a married applicant requests unsecured credit and resides in a community property state, or if the applicant is relying on property located in such a state, a creditor may require the signature of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the community property available to satisfy the debt in the event of default if:
(i) Applicable state law denies the applicant power to manage or control sufficient community property to qualify for the credit requested under the creditor's standards of creditworthiness; and
(ii) The applicant does not have sufficient separate property to qualify for the credit requested without regard to community property.
(4) Secured credit. If an applicant requests secured credit, a creditor may require the signature of the applicant's spouse or other person on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the property being offered as security available to satisfy the debt in the event of default, for example, an instrument to create a valid lien, pass clear title, waive inchoate rights, or assign earnings.” 12 CFR 1002.7(d)(1) – (4). (Emphasis added)
The type of information that a credit union needs is likely going to be a business decision driven by the particular requirements of the state law in question. As I previously mentioned, the credit union may want to consult with local counsel about specific information requirements.
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TRID Black Hole Amendment Effective June 1. The Bureau of Consumer Financial Protection (Bureau) recently finalized an amendment to its "Know Before You Owe" mortgage disclosure rule that addresses when mortgage lenders with a valid justification may pass on increased closing costs to members and disclose them on a Closing Disclosure. The update is intended to provide greater clarity and certainty to the mortgage industry. The amendment is set to become effective 30 days after the May 2, 2018 publication date in the Federal Register.