Does your finance company discriminate against creditworthy borrowers? Ten times out of ten, the company quickly answers with a definitive no. However, well-meaning companies are sometimes surprised to learn that long-standing company practices squarely violate Federal credit discrimination laws. This is a scary prospect because even unintentional violations can lead to severe penalties.
The Equal Credit Opportunity Act (ECOA), originally enacted in 1974, is the key Federal law that covers credit discrimination for finance companies. The ECOA and its implementing Regulation B generally prohibit discriminatory practices and require notifications to applicants.
Key provisions of the ECOA and Regulation B provide:
- A creditor cannot discriminate based on sex or marital status, race, color, religion, national origin, age (provided the borrower has the capacity to contract), whether the borrower’s income derives from any public assistance program, or whether the borrower has in good faith exercised any rights under the Consumer Credit Protection Act.
- A creditor is prohibited from discouraging applicants or discriminating in the process of taking applications, evaluating applications or extending credit.
- A credit application should include and not include certain information, and some inputs must be noted as optional. The appendix to Regulation B includes model application forms.
- A creditor must notify applicants of the credit decision within 30 days and send adverse action notices. Adverse actions include credit denials, counteroffers that are not accepted, and incomplete application that cannot be evaluated. The appendix to Regulation B includes model adverse action notices.
- A creditor must maintain certain records for least 25 months, including a copy of the application, any adverse action notice sent, any notice of alleged violation of the ECOA, and information related to prescreened solicitations.
To avoid potentially severe penalties, all finance companies should have a strong ECOA and Regulation B compliance management program and periodically review to confirm compliance.