Regulation B (Reg B) in the Equal Credit Opportunity Act (ECOA)

What Is Regulation B (Reg B)?

Regulation B is intended to prevent applicants from discrimination in any aspect of a credit transaction. It outlines the rules that lenders must adhere to when obtaining and processing credit information.

Regulation B protects consumers and prohibits lenders from discriminating based on age, gender, ethnicity, nationality, or marital status.

What Transactions Does Reg B Cover?

All lenders are required to comply with Regulation B when extending credit to borrowers under 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. Any information unrelated 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 protects the following credit applications and transactions for consumers:

• Consumer credit

• Business credit

• Mortgage and open-end credit

• Refinancing

• Credit applications and information requirements

• Standards of creditworthiness and investigation procedures

• Termination of credit

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.

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 for 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.

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.