Last week, I reminded traditional installment lenders and credit sellers of our obligations to clearly and conspicuously disclose credit terms under the Truth-in-Lending Act. This was my first installment in our “Back to Basics” series of blogs. I probably should have started with obligations imposed under the Equal Credit Opportunity Act, because until there is a decision to extend credit to the consumer, there are no costs to disclose.
The Equal Credit Opportunity Act (“ECOA”) and its enforcing Regulation B, dates from approximately the same time period as the Truth-in-Lending Act. This law was passed in 1974. At the time, it was a revolutionary change in consumer financial services, providing for the first time that it is unlawful to discriminate against credit applicants with respect to race, color, religion, national origin, sex, marital status, age, or because the applicant's income derives from public assistance or because the applicant has in good faith exercised any rights under the ECOA. These precepts are second nature to us today. But, they were not back then.
The ECOA is instructive with respect to evaluating and handling credit applications including your obligations with respect to declining the grant of credit to applicants. Basically, consumers are entitled to know the basis for a decision as to why a creditor has denied the extension of credit or denied the extension of credit on the terms sought by the consumer. Further, there are areas of life that the ECOA simply does not permit a creditor to question such as — marital status (if the applicant applies for individual unsecured credit), disclosure about income from alimony, child support or separate maintenance, and childbearing and childrearing practices.
One of the best features of the Regulation is that it provides sample credit applications that creditors may use in various transactions. While these form applications are not given true “safe harbor” status, the use of the forms does set the right direction for a creditor in proving compliance with the ECOA.
With this background, I take the opportunity to suggest two “best practices” for your consideration:
Practice Pointer #1: Use the model form credit application offered under Regulation B that matches up to the loan or credit sale that you are offering. Steer clear from asking questions that are not included in the appropriate model form. That is, encourage your customer service representatives not to stray from the requests for the information solicited from applicants in the forms.
Practice Pointer #2: Check your policies and procedures with respect to notifying applicants of your credit extension determination. Make certain that the rules, particularly the time-frames for response, are being scrupulously followed.