individual receives a “fresh start” in life, including employ-
ment. While many courts have concluded that a prospective
employee does not have an action against an employer who re-
fuses to hire due to bankruptcy, other courts have interpreted
this law to include prospective employees, especially where
other extenuating circumstances are involved. Such circum-
stances might involve the bankruptcy being the sole factor in
rejecting an individual who had accepted an offer of condition-
al employment, an offer extended before obtaining the credit
report. Based upon his reliance thereon, he quit his former job,
thereafter learning of his disqualification for employment with
the bank due to his failure to meet the bank’s credit standards.
In my opinion, it is prudent to review the credit history
prior to extending an offer, and engage in careful consider-
ation before rejecting applicants solely based upon bankruptcy
status. While it is incumbent upon every financial institution
to take necessary actions to safeguard its assets, it is prudent to
exercise caution when dealing with individual employee/ap-
plicant bankruptcy or insolvency.
Bankers on the Horns of the Dilemma
Reconciling the provisions of the new rules regarding
“loan originators” with the “fresh start” provisions of the
Bankruptcy Act will require careful consideration of all of the
facts before taking action, along with the assistance of counsel.
The new mortgage rules governing “loan originators”
require that the individual has “demonstrated financial re-
sponsibility, character, and general fitness that would lead you
to determine the applicant/employee will operate honestly,
fairly and efficiently.”
Under the rules, the assessment of the individual’s finan-
cial responsibility by the “loan originator organization” is suf-
ficient if certain relevant factors, excluding medical expenses,
The existence of current outstanding judgments, tax
liens, or other government liens
Nonpayment of child support
A pattern of bankruptcies, foreclosures or delinquent
Apparently, under the new mortgage rules, any one or
more of the circumstances listed above could disqualify the
individual. Would the financial institution which made a
decision to terminate employment of a “loan originator” based
upon bankruptcy status be in violation of the Bankruptcy Act?
Could that institution prevail in federal bankruptcy court
arguing that the new mortgage rule was the sole reason for
the action taken, achieving a favorable ruling, or would the
underlying bankruptcy be considered the sole reason, a clear
violation of the Bankruptcy Act. Neither the Bankruptcy
Act nor the new mortgage rules provide a safe harbor for
the financial institution caught on the horns of this dilemma.
Either way, the financial institution could expend a substantial
sum during the litigation.
Until this dilemma is rectified, financial institutions must
exercise caution in implementing the provisions of the new
rules governing “loan originators.”*
Jerri D. Cowan, Esquire, has been providing HR support for many
of Virginia’s community banks since 1992, through her company,
Human Resources Consultants. She can be reached at 804-378-
-12 CFR § 1026.36(f)(3)(ii) Truth in Lending (Regulation Z)
-12 U.S.C. 1829 FCRA, 15 U.S.C. § 1681 et seq.
-Enforcement Guidance on the Consideration of Arrest and Con-
viction Records in Employment Decisions under
-Title VII of the Civil Rights Act of 1964, as amended, 42
- U.S.C. §2000e et seq., US Equal Opportunity Commission Policy
on Prohibited Practices, Guidance Concerning the Use of Credit
- 11 U.S.C. § 525(b) See Supra Note 1
- 12 CFR § 1026.36(f)(3)(ii) and comment 36(f)(ii)(B)
*Nothing in this article should be construed as legal advice, as
facts and circumstances may dictate different actions/results.
Please obtain the advice of competent counsel prior to taking ac-
tion in the areas discussed herein.
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