The federal Equal Credit Opportunity Act (ECOA) and its implementing Regulation B are designed to prevent discrimination in credit decisions. While many of the requirements and prohibitions of the ECOA and Regulation B seem intuitive, the potential discriminatory impact of a financial institution’s lending programs and credit decision models are often less obvious. As Davenport Evans lawyer Dixie K. Hieb explains, a strong compliance management system, together with well-developed fair lending policies and procedures, is the best defense against fair lending violations.
The anti-discrimination purpose of the ECOA is put into effect via Regulation B’s definition of “prohibited basis” – race, color, religion, national origin, sex, marital status, or age, or the fact that the applicant’s income is derived from any public assistance program. A creditor may not discriminate against a credit applicant on a prohibited basis and may not discourage applicants on a prohibited basis. The ECOA applies to all creditors, including those extending business financing, and the CFPB recently issued an advisory opinion affirming that “applicant” includes borrowers – those who have already applied for and received credit.
An ECOA violation could occur due to a specific component of a lender’s credit policy, e.g., prohibiting loans to applicants over 70, discounting income from unemployment benefits, or requiring a spouse’s signature on an individual loan. More likely a violation occurs due to a judgmental component of the policy or a component that has a “disparate impact” – a facially neutral policy that has an adverse effect on a protected class.
ECOA exam procedures include questions designed to highlight factors that could lead to fair lending violations, such as:
- Does any aspect of the creditor’s credit operations vary by any of the prohibited bases, e.g., Spanish and English advertisements emphasizing different credit products?
- Do the underwriting guidelines contain any criteria that could have a negative disparate impact on a protected class, e.g., underwriting models that use ZIP codes?
- Does the creditor allow exceptions to its underwriting policies to be made subjectively or without clear guidance?
- Do employees have significant discretion to decide what products to offer or the price to offer, including both interest rates and fees?
- Do employees receive incentives depending, directly or indirectly, on the terms or conditions of the credit product sold or the price charged?
ECOA violations that appear to be systematic will be referred to the U.S. Department of Justice for further action.
Avoiding ECOA violations requires facially neutral credit policies, employee training, and monitoring for possible disparate impact. Each of the federal banking regulators has detailed guidance on point, and Davenport Evans attorneys can assist with developing credit underwriting policies, evaluating disparate impact issues, and responding to DOJ inquiries.