Could someone please refer me to the correct site that I might research to find out if an application can be denied for someone who filed bankruptcy in 1994. The customer stated it was illegal for the bank to deny the application on those grounds???? Any help would be appreciated.

It depends on the type of bankruptcy. If I remember correctly a Chapter 7 is reported for 10 years and a Chapter 13 for 7 years. If it’s a Chapter 13 it should have dropped from the credit report. However, to the best of my knowledge (without researching) there is nothing preventing you from turning down a loan based on bankruptcy, after all it is past derogatory credit.

Our bank has a strict policy that we will not loan to a bankrupt within 2 years of the bankruptcy. Exceptions can be made, but it takes the approval of our Senior Loan Committee.

I have heard some state laws do prohibit this. But that doesn't mean you can't deny it for any adverse reports which were made before or after that.

You can't deny someone because of 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.

Above are certain things you may not deny and applicant for. Everything else is OK so long as it is reasonable, and does not violate the effects test.

If challenged, I think you could have a hard time eliminating all folks because they filed bankruptcy. I would read it similar to a consumer exercising legal rights and the allowance to file bankruptcy is in the US Constitution. But I believe the associated delinquencies and defaults that go along with it easily qualify as reasons for denial.

Just be consistent in your treatment of the circumstances.

Almost missed the time element. I think most applications ask if the person has been bankrupt in the past 10 years. Some say 7 and I have seen others that asked if you ever... Reporting it and using that against them may be 2 different matters. If I say I filed 11 years ago, that doesn't mean you have to give me a loan. If I defaulted with you 11 years ago, it doesn't mean it is now OK and the slate is wiped clean. It means it won't be reported on the bureau. It doesn't, in my opinion, mean it didn't happen or that all is forgiven.

Again, there are usually other things that surround something like this that add to a disqualification is you use those criteria in your approval process.

In reply to:

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in good faith exercised any right under the Consumer Credit Protection Act

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Andy, I have "always" been taught that meant if the borrower ever disputed any transaction under a comparable reg or filed a complaint with the appropriate regulator. I never considered bankruptcy a "right" under the Consumer Protection Act. I looked at it that the borrower has petitioned the courts for relief under the bankruptcy code and that petition can be denied by the courts, therefore it's not a "right" but a "privelge". (MO)

Unless your bank has a strict policy similar to what Dan’s bank has, then you need to be cautious when using bankruptcy as a reason for denial. If the applicant has re-established credit with a number of creditors (and I mean more than just a department store account or a credit card) since the time of bankruptcy and has paid as agreed, you would be hard pressed to justify the use of this as a reason for denial with an examiner.

Iowa prohibits the denial of an application for credit based solely on a bankruptcy. However, you can deny credit for all the derogatory credit that usually accompanies a bankruptcy.

I don't mean to say that bankruptcy is under the Consumer Credit Protection Act, but comparable. That is, if a law allows a person to do something, it can be difficult to "punish" them for exercising that right, option, privilege, whatever you call it. And by that I mean the actual bankruptcy, not the delinquency that lead up to it.

FYI, a model app in Reg. B asks about bankruptcy within the last 14 years. And some of my AANs in my forms book list as a reason for denial "Bankruptcy" with no qualifications.

So as to the original question, I know of nothing that places a time frame on how far back you can go for your reason for denial. Just because it drops from the credit bureau doesn't mean it is OK. But whatever is done needs to be able to be applied consistently.

The 14 years triggered a memory. I think the Chpt 7 are reported for 14 years and Chptr 13 are for 10 years in the credit bureau.

I also agree with your rationale that just because it is no longer reported negates the fact that it happened.

Concerning our policy on Bankrupts, "knock on wood" to date we have not been critizied for it by our FDIC examiners. I think primarily becasue we apply it consistantly. And we we have defended the 2 years as being sufficient time to re-establish their credit history.

Our exceptions are primarily if the bankruptcy was due to medical reasons, business failure and the borrower is now employed (not self again) or if they have sufficient security to pledge. Recently we have added lost of employment (on a case by case basis) due to several factory closings and lay offs in our area over the past 3 to 4 years.

As I grew up on the loan side of the house, bankruptcy was a baaaaad thing. I remember being floored when I was later reviewing VA loans and discovered that you could qualify for this while you were in bankruptcy so long as you were paying.

The Fair Credit Reporting Act governs how long a consumer reporting agency may keep certain information in consumer reports. There is a ten year limit on reporting any type of bankruptcy - it doesn't matter whether it's chapter 7, 13 or 11. 15 U.S.C. 1681c(a)(1) Although a consumer reporting agency may report bankruptcies for only 10 years, nothing prevents a creditor from asking in a credit application whether the person has ever declared bankruptcy. The Equal Credit Opportunity Act does not prohibit discrimination on the basis that a person declared bankruptcy.