Equal Credit Opportunity Act ECOA – Reg B The Consumer Financial Protection Bureau has been recently created to enforce some twelve federal statues affording various protections to consumers in their financial affairs. The Bureau has begun a nationwide audit of many businesses. This training program is presented to assist businesses with compliance in regard to these laws and the Bureau’s audits.

Equal Credit Opportunity Act Overview Also known as Reg B, it applies to all creditors – its purpose is to require any firm engaged in extending credit to do so without regard to: Sex or marital status Race Applicant income from public assistance National origin ( immigration Color Any rights exercised by applicant under the status or residence questions OK ) Religion Consumer Protection Act Age TWO THEORIES OF LIABILITY 1. Unequal treatment – treat differently based on a bias listed above 2. Unequal impact – a neutral policy but an adverse affect EXCEPTION: An action is not illegal if it meets a legitimate business need that cannot be achieved be achieved some other way that is less discriminatory in its impact.

Equal Credit Opportunity Act  RULES OF APPLICATION 1. Covers creditor actions BEFORE – DURING – AFTER the extension of credit 2. Applies to all persons who, in their ordinary business, regularly participate in the credit decision – includes vendors, assignees, transferees 3. Covers every aspect of an application for credit, including: Terms of credit Collection procedures Standards of creditworthiness Investigation procedures Information requirements Revocation, alteration, termination of credit Furnishing credit information Deferring a payment or a loan modification is covered by ECOA

Equal Credit Opportunity Act Thou Shalt Not Rules A creditor shall not discriminate on any aspect of a credit transaction A creditor shall not make any oral or written statement (or advertisement) to discourage a reasonable person from applying for credit YOU CANNOT DISCRIMINATE YOU CANNOT DISCOURAGE FAQs and examples  Does this include visiting in my office?  YES  Does this include talking on the phone?  YES  No scripts or rate quotes may discourage applicants  No advertisements may discourage some, while encouraging others  No requests for prohibited info during a phone call or an in-person visit CONCLUSION: It’s a delicate balance between creditor’s need to know information to be used in making the lending decision AND the borrower’s right not to disclose irrelevant information

Equal Credit Opportunity Act Exceptions to Gathering Prohibited Info  When necessary to test compliance with Fair Lending Rules or state regs  To determine eligibility re Special Program  To conduct self-audit & verify compliance  For monitoring credit secured by real estate Evaluate Information Collected  Cannot consider child bearing to test for income interruption  Cannot consider whether telephone is listed in applicant’s name  Cannot discount or exclude part-time income DECISION SYSTEMS – (evaluating and using the information gathered)  Creditor may use her judgment to decide – a subjective opinion of application data or may use credit scoring/statistical techniques.  ECOA allows age to be considered in evaluating other information. And age may be considered if it favors the applicant in extending credit.

Equal Credit Opportunity Act  Marital Status ?  General Rule - No questions regarding marital status or a spouse EXCEPTIONS - Questions on marital status or spouse are allowed if:  Non-applicant spouse is allowed to use the account (open-ended only)  Spouse did not apply but is contractually liable on the account  Applicant – or secured property – is in a community-property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin)  Applicant relies on alimony/child support/separate maintenance to obtain the credit. Creditor may ask about these BUT must give notice that no answer is needed unless relying on this for the application.  In a joint application, creditor may ask, “Are you married, unmarried, separated?” – but only these three; “single, divorced, widowed” are implied within the term “unmarried”

Equal Credit Opportunity Act  Notifications & Signatures  Signature Rule: May not require a cosigner if applicant is creditworthy  Creditor may ask both to sign if property is used as security NOTIFICATIONS RULE – MUST NOTIFY OF DECISION WITHIN 30 DAYS (Express or implied) ( e.g., Creditor send letter: “You’ve been approved.” or simply sends credit card in envelope/implied ) The 30 day rule also applies to an adverse decision on an existing account ( e.g. defer, modify ) EXCEPTIONS: 1. Adverse notice in 90 days of making a counter-offer 2. No adverse notice needed if app is incomplete & gave app notice of incompleteness, and creditor sends adverse OR request for info missing ADVERSE NOTICE RULES: Must be delivered in writing Include name and address of creditor Nature of the action & specific reason OR notice that app can request notice within 60 days, include contact info on creditor person that will provide this notice If app is complete, being rejected, creditor can give oral specific reason.

Equal Credit Opportunity Act  APPRAISAL REPORTS – In all cases where credit is to be secured by a lien on a dwelling – whether credit is granted or not: 1. Creditor may provide a copy of the appraisal to applicant. 2. Creditor must provide a copy if requested by applicant in writing. 3. If only provide copy if requested, must inform applicant in writing of the right to receive a copy. 4. Must provide a copy if planning to put a lien on a dwelling as security. May choose to require a written request from applicant for the copy; if so, must inform applicant in writing of this right to request and receive the appraisal copy. RETENTION of Documents - General Rule 25 Months... If If an offer is made, all info must be retained 25 months, including info not used but received inadvertently or in accordance with state/fed laws or regulations Adverse action on existing account Applicant alleges (written) an ECOA violation Text of prescreened solicitations List of criteria used to select recipients All correspondence related to solicitations

Equal Credit Opportunity Act  ENFORCEMENT 1. CFPB has begun a nationwide program of auditing all sizes of businesses to verify compliance with multiple federal laws. Violations have resulted in huge fines and mandated remediation programs. 2. CFPB may assess penalty of actual damages + punitive for individual of $10, CFPB may penalize in a class action for the lesser of $500,000 / 1% of Net Worth 4. Always Costs and Attorney fee are paid by creditors if they defend unsuccessfully NO LIABILITY FOR NOTIFICATION FAILURE IF :  Inadvertent error corrected a.s.a.p. after discovery... AND  Not intentional, AND  Happened despite procedures reasonably adopted to avoid such error.  Indemnified whether notification error was mechanical, electronic or clerical

Equal Credit Opportunity Act Self-test – Allowed Use of Prohibited Data  A Creditor can perform a self-test study using prohibited data:  Sex or marital status  National origin  Age  Race  Color  Religion  Income from public assistance  Rights exercised/ Consumer Credit Protection Act The Single Allowable Use  Use must be specifically to test compliance, and  Must result in data not otherwise available.  The data is privileged against discovery re: anything involving ECOA. CONDITIONS FOR PRIVILEGE (TWO) o Corrective action must be demonstrated re: a “more than likely: ECOA violation o The privilege does not cover the self-test Metadata (header info re dates, scope, methodology, etc.) o QUESTION: If the self-test does not reveal a likely violation, if no corrective action results = no privilege and creditor is at risk?