Adverse Action Notice, Pregnancy Questions, and Fair Lending Risk
Rosa applies on February 3 for a home equity loan with Flint Hills Bank. Her file shows a 740 credit score, a 32% debt-to-income ratio, and 12 years at the same employer. During the interview, the loan officer asks whether she is pregnant and who will care for the child after birth. Rosa says she is on paid maternity leave through May and will return to the same job. On February 10 the loan officer denies the loan, writing in the file "insufficient income." On March 30 the bank sends Rosa a letter that says only: "We regret that we cannot approve your request at this time." The bank did not provide an appraisal or a right to request specific reasons. Rosa's friend, a loan officer at another institution, says the bank "probably just had a credit policy" and that timing is flexible. The bank is a HMDA reporter.
1. Identify the ECOA and Regulation B problems with the denial and the notice.
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The denial notice is late and insufficient. Regulation B requires a creditor to notify the applicant of action taken within 30 days after receiving a completed application. Rosa applied February 3 and the bank denied on February 10, but the notice was not sent until March 30, far beyond 30 days. The content is also deficient: a denial notice must include the specific reasons for the adverse action or disclose the applicant's right to request the reasons within 60 days. "We regret that we cannot approve your request at this time" gives no reasons. The bank should have sent a written notice identifying the actual principal reasons, such as insufficient income, if that was truly the basis, or disclosed the right to request them. Because the file shows a 32% DTI and stable employment, the stated reason also needs to be tested against the actual underwriting analysis; a conclusory file note is not enough.
2. Analyze the fair lending issue raised by the pregnancy and childcare questions.
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The loan officer's questions about pregnancy and childcare create serious fair lending risk. ECOA prohibits discrimination on the basis of sex, among other prohibited bases, and discrimination based on pregnancy or assumptions about childcare responsibilities is treated as sex discrimination. The questions themselves are evidence that the loan officer considered a prohibited basis, and the timing of the denial immediately after those questions strengthens the inference. "Insufficient income" looks like a pretext if Rosa's paid maternity leave was counted incorrectly or if the officer assumed she would not return to work. The bank should compare similarly situated borrowers, review the loan officer's files, and determine whether the denial was based on an actual income calculation or on an assumption about pregnancy. A "credit policy" explanation does not cure discriminatory application of that policy. Because the bank is a HMDA reporter, the file should also be reviewed for accurate action-taken and denial-reason coding.
3. What corrective actions should the bank take, and what records should it preserve?
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The bank should immediately send Rosa a compliant adverse action notice with specific reasons or the right to request them, and it should review whether the loan should be reconsidered using verified income, including paid maternity leave. It should preserve the application, credit report, income documents, loan officer notes, underwriting worksheet, denial notice, and any communication about the pregnancy or childcare questions. ECOA records generally must be retained for at least 12 months after adverse action, and HMDA records must be retained for at least three years, so the file should not be destroyed. Compliance should retrain the loan officer on prohibited-basis questions, review a sample of that officer's denials, and document corrective action. If the review confirms discrimination, the bank should consider self-identification and remediation to the affected applicant, and it should not retaliate against anyone who raised the issue.