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@@ -58,11 +58,55 @@ The board can propose changes to the lending standards, with published reasons.
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A hostile board has two ways to make co-ops look like failures without breaking any rule openly. The reviewers check for both.
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- **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)).
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- **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)).
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- **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.
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**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.
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### When rejections mean "not tested"
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"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.
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**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.
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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.
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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:
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- the reviewers' score is above the top of that band;
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- 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).
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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.
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**The line.** The bank fails a year's audit on either of two tests:
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1. **Too many turned away.** More than 1 in 10 of the applications scoring above the band were rejected wrongfully.
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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.
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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.
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**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.
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**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.
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**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.
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**What "not tested" then takes.** At the final review, the verdict is "not tested" instead of "failed" only if all three of these hold:
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1. the pilot failed its test;
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2. the bank failed the audit in at least one year;
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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."
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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.
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**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).
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**What it can't catch.**
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- **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)).
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- **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.
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- **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.
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### No quorum, no freeze
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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:
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