of Ethics Online Collection: April 1980
CODE OF ETHICS FOR THE
EXCHANGE OF COMMERCIAL CREDIT INFORMATION BETWEEN BANKS
(Revised July 1987)
CODE OF ETHICS FOR THE EXCHANGE OF COMMERCIAL CREDIT INFORMATION BETWEEN
BANKS
(Revised July 1987)
Preamble
The Robert Morris Associates Code of Ethics is the ethical standard for
conduct in the exchange of commercial credit information.
Adherence to this Code of Ethics is essential. Upon joining RMA, members acknowledge and agree to abide by these principles, and they expect others with whom information is exchanged to respect them also.
The Code of Ethics was first adopted in 1916 in recognition of the importance of the free and responsible exchange of information in the credit-based American economic system. Through the years the Code has been reviewed and amplified several times, but none of the basic principles has been changed.
This Code is designed for commercial transactions, and its use is subject to applicable federal and state laws affecting the exchange of credit information. In particular circumstances, these could include laws relating to defamation and the right to privacy, antitrust laws, credit reporting regulations, and limitations on the use of confidential records and customer information or computerized data. Such laws also include securities statutes regulating disclosure of material inside information. Since under the securities law, "material inside (nonpublic) information" may, in some cases, not be disclosed - and in other cases may not be withheld - as to transactions "in connection with" the "sale or purchase" of a "security," and such transactions may involve bank financing, care should be exercised and the advice of counsel sought where any such material inside information may be in the possession of the respondent, and the sale or purchase of a security may be involved.
There are many reasons, including the possible possession of nondisclosable material inside information, why a respondent may not be able or willing to answer an inquiry. Therefore, one should not automatically interpret silence as a negative response.
Article 1
There are two cardinal principles in the exchange of credit information:
confidentiality and accuracy of inquiries and replies. This includes
the identity of inquirers and sources which cannot be disclosed without
their permission. Adherence to these and the other principles embodied
in this Code is essential, since offenders jeopardize their privilege
to participate further in the exchange of credit information.
Comments:
Confidentiality, as it is used here, is based on the reliance placed
upon the fidelity of another with whom information is being exchanged.
A trust is placed in all parties involved that the information has
been requested for a legitimate purpose and will not be used indiscriminately.
When conducting investigations, the identity of the inquirer should not be divulged without its authorization. Similarly, the identity of the source of the information should not be made known without its authorization.
The facts presented must be accurate because the bank reference is one of the most pertinent sources of credit information. When discussing data, favorable or unfavorable, the responding bank must give a reply that is restricted to or based on fact. If a discrepancy is discovered within a reasonable time after an inquiry has been answered and is considered to be significant in relation to the purpose of the inquiry, it is prudent and ethical that the discrepancy be disclosed to the inquirer.
It is expected that, as a matter of professional courtesy, no liability
will be attached to or result from the good faith exchange of information.
If the information is for a customer, it should be screened according
to the customer's needs, credit sophistication, and ability to handle
the information discreetly.
Adherence to these and the other principles embodied in this Code of Ethics is essential. Violations of the Code could damage the reputation of offending banks and individuals and may have an adverse effect on the customer. If banks or individuals demonstrate an inability and/or unwillingness to handle and exchange credit information responsibly, they risk losing the privilege.
In addition, violations of the Code by RMA member banks may lead to the termination of their membership in the association, in accordance with Section 2.07 of the RMA bylaws.
Article 2
Each inquiry should specifically indicate its purpose and the amount
involved.
Comments:
One of the most important elements of an inquiry is its purpose. The
bank receiving the inquiry has a right to know why the information
is needed. If no purpose is given, the bank has no obligation to respond.
Knowing and understanding the purpose of an inquiry places the recipient
in a better position to respond with the type and amount of information
needed to satisfy the inquirer. When the purpose of the inquiry is
solicitation, acquisition, merger, competition, or existing or intended
legal action, reply is at the discretion of the bank of account.
The inquirer should state the initial steps taken, as well as the information on hand, in order to avoid duplication of effort.
Inquiries may be initiated either by telephone or in writing. In the interest of timeliness, many member banks regularly accept telephone inquiries.
The legitimate use of credit information is to assist an inquirer who expects to extend credit or otherwise rely on the subject of the inquiry in business dealings. An inquiry should not be answered without first determining its legitimacy and establishing the identity of the inquirer. For example, when receiving a telephone inquiry, information should not be disclosed on the first call unless the inquirer is known and identified. A return call may be used to establish the identity of the inquirer.
In the majority of instances, a specific amount is involved in the transaction which generates an inquiry. When initial trade credit is involved and no amount is established, the inquiring party should be asked for the normal size of its transactions. A range of figures such as $500-$1,000 or $50,000-$60,000 is acceptable. It is unacceptable to use fictitious figures or to inflate the amount involved to induce the responding bank to provide details beyond what may be necessary to answer the inquiry suitably. If for some reason there is no amount involved, the inquirer should state this in a manner which would logically satisfy the respondent as to the overall purpose of the inquiry. A proper inquiry should contain the following:
- SUBJECT: The subject of the inquiry should be identified as completely as possible including full name, address, and names of the principals.
- PURPOSE: The reason for the inquiry should be given in sufficient detail to allow the recipient to make an appropriate response.
- EXPERIENCE: If the inquirer has had experience with the subject, a summary of that experience should be provided. Doing this creates a true exchange of information and helps to eliminate duplication of effort.
- REQUIREMENTS: The inquirer should be specific about the information required to satisfy the needs of the inquiry, such as deposit relationships, loan experience, financial information, assessment (of) management, etc.
- OTHER: Any other factors relevant to the inquiry should be disclosed.
Article 3
Responses should be prompt and disclose sufficient material facts commensurate
with the purpose and amount of the inquiry. Specific questions should
be given careful and frank replies.
Comments:
Prompt and accurate replies are signs of dependability and professionalism
that help the users of the information conduct business on a timely
basis. It is appropriate to respond using the same method in which
the request is presented, depending on the nature of the inquiry. Although
response time to inquiries will vary depending on the amount of information
needed, the following general guidelines are considered appropriate:
TYPE RESPONSE TIME
| Telephone inquiry* | Within 24 hours |
| Telephone investigation** | Within two working days |
| Wire or cable inquiry* | Two working days of receipt |
| Written inquiry* | Four working days of receipt |
| Written investigation** | Six working days of receipt |
*Inquiries are requests for information on a bank's own customer.
**Investigations involve gathering information on an account maintained
at another bank.
If unusual delays are expected, the inquirer should be informed.
Once the legitimacy and the requirements of the inquiry are established, it is answered by providing a summary of the bank's experience and knowledge of the subject commensurate with the amount involved and the respondent's confidence in the inquirer.
When responding to inquiries, a reliance on limited electronic data may not provide sufficient information. Use of credit file information is encouraged in order to obtain sufficient material for a full exchange. If a response is based solely on a source or sources that may not contain all information in the respondent's possession, consideration should be given to an appropriate disclaimer.
A full response should include:
- The opening date of the relationship
- History of the subject
• How long established
• Legal form of organization
• Names of the principals as well as their background and experience
• Line of business - Depository relationships
A. Demand deposit relationships- Opening date-if different from the opening date of the relationship
- Average collected balances, for at least the past three
months, in RMA General Figure Ranges*
Caution: Do not use the term "substantial" to describe the balances in demand deposit accounts. Also avoid "satisfactory," except in the limited situation noted in Article 7. - Number and frequency of returns
- Credit rating on the account here, words like "satisfactory," "generally satisfactory," "unsatisfactory" are appropriate, but ensure that your bank's definition is understood.
Opening date-if different from the opening date of the relationship Average collected balances, for at least the past three months, in RMA General Figure Ranges*
C. Other
If there are any other accounts that affect the credit relationship, such as cash management or disbursement accounts, their existence should be disclosed and explained if necessary. - Summary of the
borrowing relationship, if any
- Types and nonprice terms of loans or other facilities. If a facility is secured, describe the collateral.
- Aggregate high credit and outstanding balances in RMA General Figure Ranges.* These figures should be broken down further by specific facilities if the situation warrants it.
- Guarantees and endorsements, if any, and relevant off-balance-sheet financing, such as letters of credit, should be made known.
- Dates, length, and frequency of payouts.
- Credit ratings-for example, "satisfactory," "unsatisfactory," etc., but ensure that your bank's definition is understood.
- Pricing mechanisms/ considerations -
Caution: It is strongly recommended that any compensating balance requirements and other pricing mechanisms not be disclosed. Exchanging information about compensating balances may not, in itself, constitute an antitrust violation. However, if after such an exchange there is anything approximating parallel action manifested by similarity of terms, it could be claimed that the information exchanged was used illegally. This applies to the disclosure of interest rates, fees, or other methods of compensation charged on loans as well. Like compensating balances, the charges are arrived at by the lending bank and the borrower on particular transactions and cannot be used by others as a basis for similar arrangements. - Financial statement data.
Where the subject is a publicly held company publishing current financial information, the release of financial statement data will normally be in compliance with the securities laws.** When financial statements of nonpublicly held companies are submitted to the bank, with no instructions to the contrary, a general summary of the data may usually be disclosed. This disclosure should be tempered by the respondent's confidence in the inquirer and by the amount and nature of the inquiry. The summary may consist of:- Dates of the statements and the period they cover
- Auditor's opinion
- A description of the financial condition and trends of the subject, which should include current assets, total assets, current liabilities, net worth, sales, and an indication of profitability. It is the option of the responding bank to disclose these data in actual figures or in RMA General Figure Ranges*
If comments are made regarding the financial standing of the subject, the respondent should indicate whether they are based on the bank’s analysis of the company or another source.
It remains at the discretion of the responding bank to provide the inquirer with recommendations and opinions. If a recommendation or opinion is asked for, the account officer should be consulted unless the person answering the inquiry is authorized to provide this information.
If a respondent furnishing general information is unable to provide specific data during an inquiry, where possible, the inquirer should be told why.
*See definition of RMA General Figure Ranges
**See comments in Preamble
ARTICLE 4
It is not permissible when soliciting an account to make an inquiry to
a competitor without frankly disclosing that the subject of the inquiry
is a prospect. Reply is at the discretion of the bank of account.
Comments:
The free exchange of credit information between banks depends in large
degree on the confidence that the inquiring bank is not obtaining the
information in order to solicit the respondent’s accounts.
Violations of this confidence are very serious. They not only damage the inquirer’s relationship with the responding bank, but they also create a guarded situation that can only impede the exchange of credit information. For this reason, when solicitation is the purpose of an inquiry, this fact must be clearly stated to the bank of account, which has the option to decline information on such inquiries.
If a bank is soliciting an account of a competitor and is asked by a customer to obtain credit information on the account, the soliciting bank may provide information that it already has, explain the ethical considerations involved, and suggest that the inquiring customer contact the subject’s bank directly.
All parties to credit inquiries that involve solicitation must be aware of the basic confidence inherent in the exchange of information and act in a responsible manner to preserve that confidence and trust.
ARTICLE 5
A request for information based on existing or intended litigation shall
be clearly identified as such. Reply is at the discretion of the bank
of account.
Comments:
When the purpose of a request for information is existing or intended
legal action, full disclosure of this fact by the inquirer is necessary.
It is clearly unethical to disguise the purpose of any inquiry. This
could be detrimental to the parties involved, especially when legal
action is associated with an inquiry. Under those circumstances, the
potential for damages is such that all parties must exercise considerable
judgment before conducting an investigation or answering an inquiry
of this nature.
When the bank of account is placed in a conflicting position of providing information and, at the same time, protecting its customers, response is at the discretion of the responding bank.
Article 6
All credit correspondence, including form letters, should bear the manual
signature of a responsible party.
Comments:
Manual signatures on all credit correspondence, both inquiries and replies,
are essential. Good faith responsibility for accuracy of the information
contained in the correspondence is assumed by the signer. This is the
case whether the signer gathers the information or not. The title,
if any, and the name of the authorized signer should also be typed
or printed on the correspondence. Doing this will help to address responses
correctly and to identify clearly the person to contact if questions
arise regarding the inquiry or reply.
Article 7
The sharing of credit information on a mutual customer should not be more frequent than annually, unless a significant change in the relationship requires an earlier revision.
Comments:
Credit information on mutual customers is normally reviewed annually.
It should not be necessary to inquire more frequently unless interim
financial data, news items, agency information, or other sources point
out an actual or potential problem. Information should not be requested
when there is not real need.
The bank requesting the information should give a summary of its experience first. This sharing of information by both inquirer and respondent is stressed because it prevents duplication of effort and is consistent with the cooperative spirit inherent in the exchange of credit information.
When discussing deposit relationships, RMA General Figure Ratings * are ordinarily not used in mutual revisions. Rather, industry practice is to mention their existence giving the opening date if it is other than the date of the relationship and commenting on whether, from a credit standpoint, the accounts are “satisfactory,” “less than satisfactory,” etc.; making sure that the definition of such terms is understood.
On mutual revisions, care should be taken not to discuss interest rates changed, compensating balance requirements, or other price mechanisms since revealing these data could have antitrust implications.
* See definition of RMA General Figure Ranges
Article 7
When multiple inquiries are made simultaneously on the same subject,
the inquirer should clearly state that information from the bank’s
own files is sufficient.
Comments:
There are basically two situations under which simultaneous inquiries
are made to banks within the same city: where it is known that the
subject has account relationships with more than one of them, or where
the subject’s bank(s) of account is not known (which gives rise
to what is commonly known as a “fishing expedition”).
In the first instance – more than one known bank of account – courtesy dictates that each responding bank be told that research beyond its own files will not be necessary.
The second situation - “fishing - should be avoided whenever possible. The inquiring bank should make every effort to determine the subject’s bank(s) of account before indicating any inquiry.
But if for some reason the nature of the bank(s) of account cannot be determined, the inquiring bank than has two courses of action open to it. It could make multiple inquiries as described above, again indicating to each bank that research beyond its own records will not be necessary. Or, preferably, it can approach just one bank, in the city in question and ask if it would either conduct the investigation or at least locate the name of the bank of account which the inquiring bank, in turn, can then approach separately. All banks, particularly RMA member banks, are encouraged to assist one another in situations like this, as long as this courtesy is not abused.
To ensure accuracy and consistency when exchanging credit information, the RMA General Figure Ranges should be used. It make be necessary, at times, to clarify these terms so that the inquirer and respondent are “speaking the same language.” There are four ranges:
| Low | 1-1.9 |
| Moderate | 2-3.9 |
| Medium | 4-6.9 |
| High | 7-9.9 |
The ranges can be applied to any figure category. Sample figure categories follow:
| “Nominal” | Under $100 |
| 3 figures | From $100 to $999 |
| 4 figures | From $1,000 to $9,999 |
| 5 figures | From $10,000 to $99,999 |
| 6 figures | From $100,000 to $999,999 |
And so on.
In order to choose the correct General Figure Range, look at the first digit of the dollar amount and find the range that contains that digit. To determine the correct figure category, count the number of digits in the dollar amount (ignore digits to the right of the decimal point). Report the amount using both the range description and figure category, for example, “average balances are in the medium 4 figure range.”
Examples:
| If the dollar amount is: | The General Figure Range is: |
| $350,000 | Moderate 6 figures |
| $ 100,000 | Low 6 figures |
| $475 | Medium 3 figures |
| $87,000 | High 5 figures |
| $239,452.27 | Moderate 6 figures |
