Banking Ethics in Banking 3 — Questions and Answers
Question 1: What is 'redlining' in the context of banking ethics?
- Flagging high-risk loans for additional review
- Denying services to residents of certain neighborhoods based on race or ethnicity (Correct answer)
- Marking unprofitable accounts for closure
- Setting interest rate ceilings on subprime loans
Correct answer: Denying services to residents of certain neighborhoods based on race or ethnicity
Redlining is the discriminatory practice of refusing financial services to people in specific geographic areas based on racial or ethnic composition.
Question 2: A bank teller is pressured by a manager to open accounts for customers without their explicit consent to meet sales quotas. This situation is most similar to which real-world scandal?
- The Enron accounting fraud
- The Wells Fargo fake accounts scandal (Correct answer)
- The LIBOR manipulation scandal
- The Bernie Madoff Ponzi scheme
Correct answer: The Wells Fargo fake accounts scandal
Wells Fargo employees opened millions of unauthorized accounts under pressure from aggressive sales quotas, resulting in massive regulatory penalties.
Question 3: Under the Equal Credit Opportunity Act (ECOA), which basis for denying credit is explicitly prohibited?
- Poor credit score
- Insufficient collateral
- National origin (Correct answer)
- High debt-to-income ratio
Correct answer: National origin
ECOA prohibits discrimination in credit decisions based on race, color, religion, national origin, sex, marital status, or age.
Question 4: A bank executive sells personal shares in a bank client's company just before publishing a negative research report about that company. This is best described as:
- Prudent risk management
- Insider trading (Correct answer)
- Short selling
- Fiduciary hedging
Correct answer: Insider trading
Using material non-public information to trade securities before publishing research that will move the market is insider trading, which is illegal.
Question 5: What is the primary purpose of a bank's ethics hotline or whistleblower program?
- To collect customer complaints about fees
- To allow employees to report misconduct without fear of retaliation (Correct answer)
- To process internal audit findings
- To notify regulators of quarterly earnings
Correct answer: To allow employees to report misconduct without fear of retaliation
Whistleblower programs create a safe, confidential channel for employees to report ethical violations or illegal conduct without fear of losing their jobs.
Question 6: Which regulatory body enforces consumer protection laws against unfair, deceptive, or abusive acts or practices (UDAAP) by banks?
- Federal Reserve Board
- Consumer Financial Protection Bureau (CFPB) (Correct answer)
- Office of the Comptroller of the Currency (OCC)
- Federal Deposit Insurance Corporation (FDIC)
Correct answer: Consumer Financial Protection Bureau (CFPB)
The CFPB was created by the Dodd-Frank Act specifically to protect consumers from unfair, deceptive, or abusive financial practices.
Question 7: A bank charges a fee that is disclosed only in fine print buried in a 50-page agreement, and most customers are unaware of it. This practice likely violates which standard?
- Capital adequacy requirements
- Transparency and fairness principles (Correct answer)
- Lending reserve requirements
- Fiduciary custody rules
Correct answer: Transparency and fairness principles
Burying material fee disclosures in fine print so customers cannot reasonably find them is considered deceptive and violates transparency requirements.
Banking Ethics in Banking 3
What is 'redlining' in the context of banking ethics?