Socialism: draw the line for when turned-away applicants make the verdict "not tested"

Co-Authored-By: Claude Opus 5.5 <[email protected]>
Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx

JoshHeaps.Net/Content/Socialism/durability.md

@@ -58,11 +58,55 @@ The board can propose changes to the lending standards, with published reasons.
 
 A hostile board has two ways to make co-ops look like failures without breaking any rule openly. The reviewers check for both.
 
-- **Turning away good applicants.** Every year, the reviewers audit a sample of rejected applications against the filed standards and publish the rejection rate for applications that met them. If too few co-ops get funded because applicants didn't show up, that's a real result, as [the pilot](pilot-spec.md#why-about-400-co-ops) says. If too few get funded because the bank turned away applicants who met its own standards, the final verdict says so: **"not tested,"** not "failed." The audit also covers co-ops in lower-paid work separately, so the bank can't quietly drift toward the safest co-ops ([Who the Bank Lends To](who-gets-loans.md)).
+- **Turning away good applicants.** Every year, the reviewers re-score the bank's rejected applications against the filed standards and publish the rejection rate for applications that met them. Where the line falls is set in advance ([below](#when-rejections-mean-not-tested)). If too few co-ops get funded because applicants didn't show up, that's a real result, as [the pilot](pilot-spec.md#why-about-400-co-ops) says. If too few get funded because the bank turned away applicants who met its own standards, the final verdict says so: **"not tested,"** not "failed." The audit also covers co-ops in lower-paid work separately, so the bank can't quietly drift toward the safest co-ops ([Who the Bank Lends To](who-gets-loans.md)).
 - **Making bad loans on purpose.** If the [emergency stop](pilot-spec.md#the-decision-rule) fires, the reviewers check whether the losses come mainly from loans that broke the filed standards. If they do, it's treated like fraud, not like a verdict on co-ops. Lending restarts under the original standards, and those loans are reported separately.
 
 **This isn't a way to keep the bank alive.** "Not tested" means exactly what "failed" means for the bank: no new loans, the wind-down, and no second round of money. It only changes what the record says about co-ops. Nothing on this page extends the timeline either. The latest the final review can happen is year 15, which is the pilot's existing rule for when good applications are scarce.
 
+### When rejections mean "not tested"
+
+"Turned away applicants who met its own standards" needs a line drawn in advance, or a board could argue about it forever. The line is filed with the rest of the plan before the first loan.
+
+**What the reviewers check.** Every year they re-score every complete application the bank rejected, and every one it approved. They also re-score a random sample of applications that were withdrawn, left incomplete or passed the 120-day limit, since pushing people to give up is another way of saying no. Checking every file, not a sample, removes the argument about sampling luck. It costs something, perhaps a few hundred thousand dollars a year if the bank decides several hundred applications, and that cost counts against the bank's money test like any other.
+
+They score each file with the filed scoring model, from what the applicant submitted plus the checks the standards call for, like credit reports. Any change a loan officer made to the applicant's numbers counts only if it's a reason on the filed list. Paperwork made after the decision, like closing documents, is removed first, so the reviewers can't tell which files were approved.
+
+Around the bank's approval line there's a band where the bank decides by lottery ([the lottery at the margin](pilot-spec.md#who-co-ops-are-compared-against)), and honest judgment calls fall there. A rejection counts as **wrongful** if both of these are true:
+
+- the reviewers' score is above the top of that band;
+- the file doesn't show a reason from the filed list of disqualifiers that the reviewers find is actually backed by the file. Examples are a false statement, a sham co-op, or a missing document. A missing document counts only if it's on a standard checklist every applicant gets, with a deadline filed in advance. A reason that isn't on the list doesn't count, however sensible it sounds. The bank can add reasons to the list, but only publicly and only for later decisions, the same way it changes any [lending standard](#what-a-new-board-cant-change).
+
+Every rejection notice names the specific reason, which federal fair-lending law already requires for most small-business applicants and makes available on request for larger ones ([12 CFR 1002.9](https://www.law.cornell.edu/cfr/text/12/1002.9)), and also gives the applicant their score.
+
+**The line.** The bank fails a year's audit on either of two tests:
+
+1. **Too many turned away.** More than 1 in 10 of the applications scoring above the band were rejected wrongfully.
+2. **The best kept out.** Wrongly rejected applicants scored higher than the approved applicants who also scored above the band, by more than chance explains. That comparison leaves out the lottery winners from inside the band, who would always score lower and make an honest bank look guilty.
+
+Co-ops in lower-paid work are held to the same line separately ([Who the Bank Lends To](who-gets-loans.md#money-set-aside)), and the yearly report also breaks the rejection figures down by the founders' race, ethnicity and sex. The report also publishes how often each disqualifier was used, so a sudden jump in "sham co-op" or "missing document" stands out.
+
+**The same line for approvals.** Rejections aren't the only way to rig a test. Approvals scored below the band, outside the lottery, with no filed reason, are counted too, and more than 1 in 10 fails the audit the same way. Those loans are reported separately, like loans that [broke the standards](#rigging-the-result). This keeps the audit from pushing loan officers toward saying yes to everything.
+
+**Why 1 in 10.** There's no good benchmark for how often a lender wrongly turns away a clear pass, so 1 in 10 is a judgment call, set loose on purpose. Small-business loans are far less standardized than mortgages, and the lottery band already absorbs the close calls. Even so, when a bank is breaking its own rules on more than 1 clear case in 10, it isn't running the test the law describes. For approvals there's loose context: when mortgage lenders re-check loans they've already approved, they find serious errors in about 1.5% of them ([ACES, 2025](https://www.send2press.com/wire/aces-q4-and-cy-2025-mortgage-qc-industry-trends-report-shows-critical-defect-rate-falls-to-annual-low/)). That's a much more routine kind of loan, which is part of why the line here is set far looser.
+
+**Fixing it, not just labeling it.** Every applicant found wrongly rejected, in any year, is offered a new decision within 60 days. It's made on the reviewers' score, and only a disqualifier the reviewers confirm can block it. That undoes most of the damage while the pilot is running. The fix isn't a lending target. It only brings in applicants who met standards the bank filed itself. Loans made this way count in full in both deciding measures. They're also reported separately, since a group that waited a year may not be the group it was.
+
+**What "not tested" then takes.** At the final review, the verdict is "not tested" instead of "failed" only if all three of these hold:
+
+1. the pilot failed its test;
+2. the bank failed the audit in at least one year;
+3. the wrongful rejections that were never fixed could have changed the result. Those are the ones where the group turned down the new offer, had broken up, or never got one. The reviewers add them back as if each had done as well as funded co-ops with similar scores. If that would turn the survival result into a pass, the verdict is "not tested." If not, it stays "failed."
+
+Otherwise a fail stays a fail. A pass stands too, since rigging that didn't work doesn't change what the co-ops did. And "not tested" gives the bank no claim to the fast-track vote or to new money.
+
+**It can't easily be used to dodge a fail.** A friendly board can't see a fail coming and use this rule to hide it. The verdict comes years after lending ends, every wrongful rejection is offered a new decision, and step 3 asks whether the missing co-ops would have changed the numbers, not just whether some were missing. Rejecting good applicants on purpose to set up that excuse would also have to happen in writing, because an unrecorded reason counts against the bank. Any instruction to reject a particular application is covered by the rules against [political favoritism](pilot-safeguards.md#political-favoritism).
+
+**What it can't catch.**
+
+- **Scoring can be wrong.** If the filed scoring model itself counts against some founders more than it predicts repayment, re-scoring with the same model won't show it. That's checked separately ([Who the Bank Lends To](who-gets-loans.md#treated-the-same)).
+- **People who never apply.** An audit of files can't see people who never applied because the bank was slow, hard to reach or cut its outreach. The published application and approval rates ([After a Pass](scale.md)) are the only check there.
+- **What isn't written down.** Scoring from the file can't see what a loan officer learned in a meeting and didn't write down. That cuts both ways: a bank that wants its reasons counted has to write them down.
+
 ### No quorum, no freeze
 
 Unlike the Export-Import Bank, this bank can't be frozen by leaving board seats empty. It uses ordinary delegation, which keeps the President in charge:

JoshHeaps.Net/Content/Socialism/open-problems.md

@@ -19,7 +19,7 @@ An honest list of what the model hasn't solved yet, most dangerous first.
 
 5. **Scale.** *(Partly answered.)* Even a total success at pilot scale leaves most workers in conventional firms. The labor-market effect needs a sector large enough to move wages, and nobody knows how long growth to that size takes, if it happens at all. That's the price of not forcing it. [After a Pass: How Big, How Fast](scale.md) works through the numbers: even growing at twice the recent pace every year, co-ops would take about 19 years to reach 1% of today's private jobs. Growth after a pass comes in capped stages sized to demand the reviewers certify, and the labor-market effect gets its own test, by lottery, in local markets where co-ops could become a large share of one kind of work. Still open: the closest evidence cuts both ways (big retailers paying more didn't lift other employers' pay; hospitals hiring nurses did), the local test can only find fairly large effects, and co-ops may never become a big enough share anywhere to find out.
 
-6. **Political durability.** *(Partly answered.)* Gradual construction invites gradual repeal. [Making It Last](durability.md) builds the bank to survive a hostile government: the lending standards and the test are fixed in law, board vacancies can't freeze lending, the verdict says "not tested" rather than "failed" if the bank turns away applicants who meet its own standards, and repeal can't unlock the co-ops. Still open: after the Supreme Court's 2026 ruling any president can replace the bank's board; money not yet lent can be taken back in a budget bill; the lock's bankruptcy protection depends on a federal law that can be repealed; and at pilot scale the sector has no real constituency.
+6. **Political durability.** *(Partly answered.)* Gradual construction invites gradual repeal. [Making It Last](durability.md) builds the bank to survive a hostile government: the lending standards and the test are fixed in law, board vacancies can't freeze lending, the verdict says "not tested" rather than "failed" if the bank turns away applicants who meet its own standards (every rejection is re-scored, the line is more than 1 in 10 clear passes turned away, and the result has to be one those applicants could have changed; see [the line](durability.md#when-rejections-mean-not-tested)), and repeal can't unlock the co-ops. Still open: after the Supreme Court's 2026 ruling any president can replace the bank's board; money not yet lent can be taken back in a budget bill; the lock's bankruptcy protection depends on a federal law that can be repealed; and at pilot scale the sector has no real constituency. The 1-in-10 line is a judgment call with no benchmark behind it.
 
 7. **Growth and dilution.** *(Partly answered.)* Softened by the tenure ramp, not eliminated, and federal tax law softens it less than the founding plan expected: by default, the part of a share new members haven't reached goes to the reserve, not to other members ([How a Locked Co-op Is Taxed](taxes.md#the-tenure-ramp)). In steady state, an equal split per head still means a marginal hire must generate the average surplus to break even for incumbents. Capital-intensive expansion into lower-margin lines will face internal resistance conventional firms don't have. [When Growing Means Sharing](growth.md) makes Mondragon's answer the standard path: a lower-margin line becomes its own locked co-op, funded from the parent's reserve as a finite, voteless investment, under rules that stop it being used to push existing workers out or move money through insider deals. Still open: growth that can't be split off still dilutes, spin-offs create richer and poorer co-ops (the groups can pool profits, but don't have to), and the evidence comes from co-ops that could hire non-members, so it probably understates the problem under the lock.
 

JoshHeaps.Net/Content/Socialism/scale.md

@@ -54,7 +54,7 @@ If the pilot passes, the charter sends Congress a fast-track vote on more capita
 
 - **Each stage is sized to audited demand, not a target.** The bank can ask for enough capital to fund the good applications it had to turn away for lack of money, plus at most 20%. Only unique applicants count, only those that met the bank's filed lending standards, and the count is certified by the independent reviewers, not the bank ([Making It Last](durability.md)). Delays don't count. There are still no lending or job targets. An institution with a target lowers its standards to hit it, which is what sank Venezuela's co-op push ([The Pilot, in Numbers](pilot-spec.md#two-warnings-from-real-life)).
 - **Capped growth.** No stage can more than double the bank's capital. A bank that suddenly has to find ten times as many borrowers will lower its standards without meaning to.
-- **Demand can't be starved, either.** Applications and approval rates are published against the pilot's own. A hostile administration can't cut outreach, tighten what counts as "good," and then claim nobody wants to borrow, because the reviewers already check a sample of rejected applications every year and publish how many met the standards anyway ([Making It Last](durability.md)).
+- **Demand can't be starved, either.** Applications and approval rates are published against the pilot's own. A hostile administration can't cut outreach, tighten what counts as "good," and then claim nobody wants to borrow, because the reviewers already re-score rejected applications every year and publish how many met the standards anyway ([Making It Last](durability.md)).
 - **The same rules at every stage.** Market rates, the same underwriting, the same limits by industry and county, and no federal guarantee on anything the bank borrows.
 - **Growth follows the evidence for each kind of work.** Lending to co-ops in lower-paid work is sized from that group's own result. If the pilot had too few of them to tell, that lending can't grow faster than the rest ([Who the Bank Lends To](who-gets-loans.md#results-by-group)).
 - **The same measures, published for every new group of co-ops.** Each later round of capital is its own vote in Congress, so every Congress sees how the newest co-ops are doing, not just the pilot's. A passed test shows that co-ops funded one way, at one size, could compete. It doesn't show the same is true at a larger volume, when the bank has to reach further for borrowers.

JoshHeaps.Net/Content/Socialism/who-gets-loans.md

@@ -36,7 +36,7 @@ A co-op can be in both groups, one or neither.
 **Unused money goes back, but only after a check.** At the end of year 4, any money not yet lent goes back to the general pool, but only if the reviewers certify two things:
 
 1. The bank decided applications from lower-paid co-ops as fast as others, measured from a complete application, within a time limit filed in advance.
-2. An extra-large audit of rejected lower-paid applications found that the bank applied its own standards.
+2. The audit of rejected lower-paid applications found that the bank applied its own standards ([the line](durability.md#when-rejections-mean-not-tested)).
 
 If they can't certify both, the money stays set aside until the lending window closes. The verdict for lower-paid work is then **"not tested,"** not "failed," unless the reviewers show that good applications really were scarce.