ECOA – do you know what it is?

The Equal Credit Opportunity Act (ECOA) and Regulation B prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), or because an applicant receives income from a public assistance program or has in good faith exercised any right under the Consumer Credit Protection Act. The Federal Reserve Board’s Regulation B at 12 C.F.R. Part 202 implements ECOA, and the staff’s official interpretations are incorporated in Part 202, Supp. 1.

At first glance many companies believe that the ECOA only affects consumer credit. Think again. A lack of knowledge of the specific requirements under the ECOA may leave sellers exposed to claims of discrimination by individual consumers, potential non-consumer buyers or, more importantly, from a class action filed against your company. Violators of the Act can face class-action suits. If found guilty, the offending institution could have to pay out punitive damages totaling the lesser of $500,000 or 1% of its net worth.

Under Regulation B, § 202.7 (d)(1), generally a creditor may not require the signature of an applicant’s spouse or any other person, other than a joint applicant, on any credit instrument if the applicant qualifies for the amount and terms of the credit requested under the creditor’s standards of creditworthiness. This rule applies to all open end and closed end secured and unsecured extensions of consumer credit and business credit.

If an applicant does not meet the creditor’s standards of creditworthiness, then the creditor may condition approval of the credit application upon the applicant either (1) furnishing the signature of another person (cosigner, guarantor or similar person), but the creditor may not require that person to be the applicant’s spouse, or (2) securing the credit extension with sufficient collateral (or in the case of an application for secured credit, additional collateral) to satisfy the creditor’s standards. Therefore, if a creditor routinely requires spousal guarantees, for example, without first ascertaining whether an applicant is creditworthy, then the conditioning of the loan on the spousal guarantee violates §202.7(d)(1).

There are exceptions to the general prohibition against requiring signatures of non-applicant spouses for creditworthy applicants under § 202.7(d)(1). A creditor is permitted to take into account state property laws that directly or indirectly affect an applicant’s creditworthiness.

Unsecured credit-non-community property state: If an applicant requests unsecured credit and relies in part on property the applicant owns jointly with the applicant’s spouse to satisfy the creditor’s standards of creditworthiness, the creditor may under § 202.7(d)(2) require the signature of the applicant’s spouse only on the instrument(s) necessary, or reasonably believed by the creditor to be necessary, under the law of the state in which the property is located, to enable the creditor to reach the property being relied upon in the event of the death or default of the applicant.

Unsecured credit-community property state: If a married applicant requests unsecured credit and resides in a community property state, or if the property upon which the applicant is relying is located in such a state, the creditor may under § 202.7(d)(3) require the signature of the applicant’s spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law, to make the community property available to satisfy the debt in the event of default if:

(i) applicable state law denies the applicant power to manage or control sufficient community property to qualify for the amount of credit requested and

(ii) the applicant does not have sufficient separate property to qualify for the amount of credit requested without regard to community property.

Secured Credit: If an applicant requests secured credit, a creditor may under § 202.7(d)(4) require the signature of the applicant’s spouse on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law, to make the property being offered as security available to satisfy the debt in the event of default. Even if a corporation is creditworthy, a creditor may require the personal guarantees of the partners, directors or officers of a business, and the shareholders of a closely held corporation. In accordance with Regulation B, a creditor is prohibited from requiring the signature of the guarantor’s spouse in the same way that it is prohibited from obtaining the signature of an applicant’s spouse and the Official Commentary to Regulation B states that the signature rules of § 202.7(d) apply equally to guarantors. Thus, if a creditor first determines that the guarantor is not creditworthy based upon his or her individual assets, then, in accordance with the signature rules of § 202.7(d), the creditor may require an additional signature and that signature may be required to be the guarantor’s spouse’s in appropriate circumstances (i.e., in accordance with § 202.7(d)(2) (unsecured credit), § 202.7(d)(3) (unsecured credit involving community property) or § 202.7(d)(4) (secured credit)). In any event, while a creditor may require officers of a business to personally guarantee the business loan, and may require the guarantee of another person in appropriate circumstances, the creditor may not automatically require that spouses of married officers also personally guarantee the loan.

Credit Response or Declination Notice as required by the ECOA:

• Providing Notice: Within 30 days, business creditors must provide notice to an applicant of any adverse action. Under the statute, the term adverse action includes the revocation or denial of credit to an applicant, and change in the terms of a credit agreement already in existence, and/or a refusal on behalf of a creditor to grant credit in substantially the same amount or upon substantially the same terms as requested.
• Notice must be sent by the creditor if credit on the requested terms is denied or if credit is approved on less favorable terms than what was requested or less favorable than the creditor’s normal terms. The notice must contain a statement of the action taken; the specific reason for the adverse action; the name and address of the creditor; a statement informing the applicant of their right to request a written statement of the specific reasons for the adverse action within 60 days; and a copy of ECOA Notice 701 (a), along with the name and address of the federal agency that administers compliance.
• If a written request is made, the creditor must send a writtenstatement giving the reasons within 30 days. It is recommended that you draft a standard declination letter, which includes a declination statement, your name, address, phone number, fax number and/or email address, the reason(s) for the declination (which may be by checkboxes), and the ECOA Notice 701 (a). Specific reasons for the adverse action may include:
  • Delinquent credit obligations
  • Need for additional references
  • Unfavorable trade references
  • Inability to verify references

The ECOA requires that an applicant’s records be kept for 60 days after notifying the applicant of the action taken. If the applicant requests in writing the reasons for the adverse credit decision during the 60 day period, the creditor must retain the applicant’s records for at least 12 months.

Please contact our office for additional information, or a sample of a Declination/Credit Response Form.