Having different risk based pricing standards for married and unmarried COA applicants based solely on their marital status violates ECOA Hey everyone, this is Mark with a special Archive episode of With Flying Colors. I hope you enjoy. Do you want to maximize your success with NCUA? Join Mark Treichel as he shares with you the Insider's View on passing your exam with Flying Colors. The With Flying Colors podcast is sponsored by Credit Union Exam Solutions by Mark Treichel.
If you would like to work directly with the Credit Union Exam Solutions team and receive Support to optimize your results with NCUA. So you save time and money. Visit us@marktrical.com to find out more. Hey everyone, this is Mark TriCal with another episode of With Flying Colors. I'm here again with Joe Goldberg. Joe, how are you doing this afternoon? Going well Mark. Hope you are too. Doing well, doing well. Just got my HVAC replaced here and I've got a chill in the air. So life is good.
All right. So, Joe, you were, have been an attorney for 40 years. You also taught consumer law and at the, at the, Your last transition to consulting and doing some other things that I know you do, you were at NCUA for eight years where you were in charge of the division that was responsible for HMDA, fair lending, and, you know, consumer compliance in all areas. And that's where I met you. And that's how we got connected here on the other side, now that we're both outside of NCUA.
And I'm looking forward today to chat with you. About the ECOA and, and Reg B and the significance and purpose of fair lending and ECOA. So with that, Joe, I'm going to turn the, the, the microphone over to you. Thank you very much, Mark. Appreciate it. I appreciate, appreciate the opportunity to talk about this because being a somewhat of a consumer compliance nerd, you know, this is this is enjoyable for me. I'm going to talk about the equal credit opportunity act.
And it's regulation, Reg B, COA is how it's usually abbreviated the acronym. I'm going to go a little bit into the background, why it's important, and then get into some of the meat of the, of the, the law itself and the regulation. Uh, before I start though, I do want to make. Big one statement is, and that is, I know that N. C. U. A. has increased its focus on fair lending in the last several years. They even started when I was there.
I left there at the end of 2021, but that's that's still true. And, in fact, the agency is expanding its fair lending examination program. So, having a discussion about eco is probably important for credit unions at this time. Well, and Joe, let's pause there here, right on the front end. So you and I were chatting offline and they added a new supervisor that's responsible essentially for just that. If I, if I remember, right, right.
There's now a division for fair lending supervision, a whole separate division within the office of consumer financial protection. So that, that tells you right there that the agency is serious about expanding the program. Yes. And I would even say, and I've said this several other podcasts of different topics that.
Chairman Todd Harper is very passionate about consumer compliance, which includes this, and he has been operating as chairman with two Republican board members, and board member Rodney Hood's term is up in August, and in all likelihood, there will, I would envision a relatively quick turnaround there so that this is the only agency that's, that has more, more Has a controlling interest by the party that's not in the president.
So, you know, Rodney Hood's done a great job as a board member, but there are things I think that in this arena that chairman Todd Harper may want to do, like expanding it again with this next budget that comes up for 2024. All right. With that, that's my, that's my two cents on it. Again, the microphone is yours, Joe. All right. Thank you. So let's first look at the significance and the purpose of the Fair Lending and the Equal Credit Opportunity Act specifically.
So what ECOA does is it requires creditors to make decisions related to providing credit and the terms of credit based, they would base them solely on credit related factors. That's in a nutshell, that's the purpose of ECOA. Because, as we'll talk about, there are other factors that are discriminatory in nature and therefore illegal.
So, Congress passed the Equal Credit Opportunity Act in 1974, and as Congress sometimes does, not always, But they did with respect to ECOA, they put right in the law findings and purpose, and I'm, I'm going to read it to you so you see exactly what it is that Congress intended when they did this, the Congress finds that there is a need to ensure that the various financial institutions and other firms engaged in the extension of credit exercise their responsibility to make credit available with
fairness, Bye bye. Bye. Impartiality, excuse me, impartiality and without discrimination on the basis of sex or marital status. Economic stabilization would be enhanced and competition among the various financial institutions and other firms engaged in the extension of credit would be strengthened by an absence of discrimination on the basis of sex or marital status, as well as by the informed use of credit, which Congress has heretofore sought to promote.
It is the purpose of this act to require that financial institutions. And other firms engaged in the extension of credit, make that credit equally available to all credit worthy customers without regard to sex or marital status. Well, that that's that's it. That's the purpose of of this and what. Congress intended when they wrote this law. Now you'll notice it repeatedly refers to sex or marital status. Two years after this was passed in 1976, Congress added the other seven prohibited bases.
That's the term used for what, if that particular term or quality was used in the, Decision process would constitute discrimination. So, there are 9 of them, even though the original purpose and the original act is only with respect to sex or marital status. So, what it does is, if you have the written purpose that I read in front of you, you would see it does 2 things. Prohibited discrimination in credit transactions.
And then require disclosure of why credit was denied or changed that has to do with the informed use of credit. That was in that purpose. You may be familiar with the term adverse action notices and that's what I'm referring to about the disclosure of the reasons for credit being denied or terms being changed. You know, there's now good to point that out. Yeah, there's, there's now a 3rd primary purpose.
Congress amended ECOA in the Dodd Frank Act, and because of a regulation recently released by the CFPB, creditors who make credit available to small businesses. And there's a threshold amount to come under this provision, but those who do must collect and report data with regards to those small business transactions to the CFPB. I'm not really going to talk about that in this podcast because it's, it would take up too much time and we have, we'll do that in another podcast. You got it.
You got it. All right, now, then there are some other smaller provisions of lesser importance. I would characterize that as, but I'll talk about those very briefly toward the end of the presentation. All right. Now, one thing before I dive into the details. I just want to review. The difference between a law and a regulation, because we do talk about a, which is a, an act.
It's a law passed by Congress and also the regulation laws that laws are enacted by Congress regulations are promulgated by somebody that's appointed by Congress to promulgate the regulations. Usually it's an agency. Sometimes it refers to an individual, such as the secretary of, but the purpose is. To allow the entity that has expertise in a certain matter to come up with the fine details and the rules and regulations that Congress. Requires in a wall. That's a, that's a, that's a great point.
Let's let me just kind of pause there. So putting that in, like, in terms, the federal credit union act is a fact approved by Congress. And then that would require in some instances, or other actions would require promulgate regulations as you describe.
Which allows the kind of the mission and the principles, I guess, to be put in place in the law, and then it gives the regulators some authority to make it a little bit more nimble, so they don't have to run back to Congress if a change on how it might be implemented or whatever was delegated to the, uh, To the agency to regulate any thoughts on what I just said, no, that that's exactly right.
The, to some extent, the law is often the outline and then the regulation is the details that fills in the outline the regulation will do such things as define. Parts of the law, it may explain what certain things in the law are supposed to mean. It will create the rules. And by regulation, but those are the rules by which those who are covered under that law must must act.
And, yeah, it's, it's the, the whole purpose is to recognize that there are those with expertise, more expertise in Congress in a specific area, and they are more capable of providing the details than Congress. This is the way the government is intended to work anyway. Right, and there are restrictions and agency cannot go beyond what a law provides. It can, as I said, it can define certain things. It can create the rules, but it can't add.
To the law, unless Congress specifically says this agency shall say. Who this affects, and it does that in some respects with the consumer protection laws, it does give now the CFPB the authority to determine whether there should be any exceptions to those who are covered under the law. Sometimes that's in the law, but a lot of times that's left up to the agency and you'll, you'll find that there are exceptions. We know that with a number of, a number of consumer protection laws.
Anyway, so generally speaking, we'll talk about the law and talk about a COA. I'm not really going to differentiate between the origin, whether it's in the law or the regulation, because I think it's more important that you hear what it is you have to comply with, regardless of where it came from. And you can always go look them up if you're, you're that interested. You got it. All right. So now first, first thing is the coverage of ECOA. What does it cover?
Well, it covers all forms of credit, not just mortgage loans, but all sorts of loans. And it covers consumer credit, but also small business lending. And as I said, there is a new provision that we aren't going to get into the details, but essentially Congress decided that just because somebody is seeking credit as a business, that they should not be victims of discrimination. So there are provisions that apply to business lending as well.
All right, now the 1st general purpose or primary purpose of ECOA, as I said, is to prohibit discrimination in any aspect of a credit transaction. And that's in quotes, any aspect of a credit transaction. That term is defined in Regulation B, and applicant's dealings with a creditor regarding the application. And that's pretty much from beginning. Of the application process, even before that, because we do, there is marketing involved that can be discriminatory.
And then there are also provisions that apply to when the credit has already been. Provided to a borrower and what happens down the line. Uh, and 1, I want to point that out because a couple of years ago, there was a court case in which the court decided.
That apparently, without reading the regulation that, because so much of a refers to applications and applicants that it only apply to the application process and nothing after that eventually higher courts corrected that because there are provisions defining. The different terms and application does actually for purposes refer also to what happens after the application has been approved. So, Joe, yeah, I just learned something.
So on the advertising side, every aspect, it could be advertising and that I guess that would be. Like, a redlining situation where someone chooses not to market in a particular area if they're. If there are reasons for that were flawed because they were trying to discriminate that would apply to this, right? I right. Okay. Great. Yeah. I hadn't I the advertising piece of it. It just never clicked with me. But the way you described it there, I was very helpful.
Yeah, there are exceptions for some types of credit, but generally speaking, especially for consumers, it's pretty much all credit 1 thing that I will talk about at some point is what's called a special purpose credit program. And there are, there's some other. Provisions that allow disparate treatment, if you will, if the party involved is in an economically disadvantaged class, and that treatment is beneficial to that person and others that are in the economically disadvantaged class.
Well, I'll talk about that along the way, because it actually applies to a couple of different provisions here. So that's, that's essentially what is covered by ACOA. And the term that's used in the act of the regulation is prohibited basis or prohibited bases is the plural. The act itself ECOA contains all the prohibited bases that are covered by the provisions of ECOA. They are race, color, religion, national origin, sex, marital status, age.
Whether an applicant's income derives from any public assistance program, and whether an applicant has in good faith exercised any right under this chapter. Now, this chapter is a group of laws that are considered to be the consumer protection laws, federal consumer protection laws. And I'm going to talk about each one of these specifically, so you'll get some idea of what is meant by these terms.
And 1 of the 1 of the items that you also have to realize is that the prohibitions can extend beyond just who the applicant is. For example, a creditor cannot discriminate against an applicant because that applicant does business with somebody of a particular race, religion, or national origin. So it's, it's, it's broader than it sounds, but it's done to prevent discrimination. I mean, it still satisfies that purpose. Let's take a look at what these terms mean.
Race and color mean exactly what you think they mean. I don't think there's any need to go into what, what the definitions are. They're self explanatory. A national origin, uh, probably also falls into that category, but under the official interpretation of Reg B, a creditor can consider a person's citizenship in some circumstances. They would still have to be related to the credit evaluation process, but here's an example.
If the applicant would be required to provide security for the loan, Let's say it's a motor vehicle loan. The car is going to be security. The creditor consider can consider whether that security would be available to the creditor in the event of a default. So somebody from Europe is in the United States legitimately here, buys a car, gets a loan for it, but has the capacity to take that car. Across the Atlantic and use it there.
The creditor who's considering the application can make the determination that the risk of not having the security there could be a reason to deny the loan. That's a great example. Yeah, no, that, that makes perfect sense. Yeah, I mean, and it does make sense. I mean, it's not, you know, the creditor should not be put in a position where it's really just, you know, a risky loan that shouldn't be made. Right. All right.
The term sex refers to gender, at least originally referred to gender, but also prohibits discrimination based on sexual preference and gender identity. So it's kind of a broader term than it first appears and marital status. Was originally included here.
In fact, the, the, the original ECOA, I think, grew out of the practice of mostly wives, not being able to get credit on their own because they needed either the creditor would require a husband to be a co signer or guarantor or be involved in the credit transaction because, you know, wives weren't considered to be a good credit risk. Right. And obviously, even even back in 1974, it was pretty obvious that was just purely discriminatory.
And there was real the real basis for that kind of analysis. So, you know, now a spouse who applies for credit cannot be denied credit. If he or she qualifies on his or her own without the need to have a spouse. Now, couple of things. Number one, if that person does not qualify to get credit on their own, and a guarantor or co-signer is required, creditor cannot require the guarantor or co borrower to be the spouse 'cause that would just be a way to get around this prohibition.
Secondly, there is an exception to this, similar to the citizenship issue that I mentioned. And that is, there are some states where their property laws would make it so that if one individual applies for credit. That could involve security that could be impaired without the other spouse being part of the transaction, right? Generally, it's a domestic relations type of matter.
Usually what is what happens, but the creditor can take into account whether the state law gives that applicant spouse an interest. In the property being offered as collateral again, it's the same same analysis. Would that create an undue risk? That would make the transaction 1 that the creditor would not approve. Sure. That makes sense to, you know, right? Right. So, you know, sometimes the laws do make sense. Yeah, that's good. It's good. It's good.
When we can, we can, when we can conclude that that's true. Yeah. All right. Also, I do want to mention this credit unions and all other creditors and not evaluate unmarried co applicants differently than married co applicants. And I want to refer to a letter to credit unions that NCUA sent in February of 2022. The letter is 22 CU 04.
And in that letter, the agency pointed out that having different risk based pricing standards for married and unmarried COA applicants based solely on their marital status violates ECOA. And the letter mentions that a common violation that NCOA examiners were seeing, and I believe they are still seeing, is when married co applicants apply for credit, the credit union will use the higher of the two credit scores.
But when the co applicants are unmarried, the credit union will use the score of what it considers to be the primary applicant. Sometimes we ask how they determine that and we would get the answer. It's the one who signs the contract first, but signs the application first, you know, but the point is that it's marital status is what's dictating how the, the creditor is evaluating the applicants and that's improper. You're getting treated better if you're married than if not.
And the reality is the risk is the same and it's a violation to discriminate against the. In this example, you gave choosing the lower credit score because because they weren't married is a clear violation. And unfortunately, for a lot of credit unions, that's right in there. It was right in their policies and procedures. And, in fact, I'm going to talk about this a little bit at some point down the line in this presentation that requires.
The regulatory agency to refer the matter to the Department of justice to see if it wants to take over the case. So, you know, words of the wise, if if there's anything like that. In your policies or procedures, you need to evaluate them to make sure that you're not in violation of the. And I'm just kind of dovetails into the next one, which is age discrimination based on age is a violation. But there's a few caveats to that. Number 1, if the applicant is below the age.
That. Of majority where the person can be bound to a contract. Usually, it's under the age of 18, 18 is a magic age down almost every state. I believe if the person is under that age of majority age can be considered a factor because again, you get into security because if that person can person can essentially renounce the contract, it becomes a problem for the creditor. Other than that, credit related factors are the only way to judge whether that a young person is entitled to credit.
And I'll talk about that in a second. Well, let me just talk about it now. There are standards that a creditor consider, that can, the creditor can consider, such as length of employment. Now, length of employment would have to be a reasonable amount of time. It could not just be a proxy for age. Thank you. Uh, it can't be such a long period of time that somebody, let's say 21, you know, could never qualify because they hadn't been working since they were age 10 or something along those lines.
That's an extreme example, but that's that's the idea is that it has to be a legitimate consideration and not 1 just because the creditor doesn't want to loan to really young people. Joe, when you're, when you're, when you're talking through that, I'm thinking about the Columbia. Record thing that you could join back in the day where you'd get, you'd get 12, 12 or 13 tapes or record albums for a penny and you'd tape your penny on it.
And then after that, you'd have to, you'd have to buy six or eight, six or eight albums that, you know, at an inflated price. And I remember at my school there, there was. An understanding that if you were under 18, you could do that. You could get those 15 record albums for a penny. And then when they, when they told you that they, that you needed to live up to the terms of the contract, you weren't 18 yet. So you couldn't, they couldn't demand that you then buy those next overpriced.
Absolutely. So, yeah, I do. I'm older than you. I remember that. So, all right. But a couple of things. First, it is permissible for a creditor to use age to provide a benefit to an elderly applicant. That's a term that's used. I'm not using any kind of disparaging term. It says right in there, elderly applicant, and maybe it is disparaging because elderly for a code means 62 years or older, which I'm not. I'm not sure that qualifies as elderly these days, but that's what exactly.
Yeah, so if it's a benefit to somebody in that age category, 60 to 62 or older, then age can be considered. And now there's another provision that allows a creditor to use a system that does consider age, but under very narrow circumstances. It can't be a negative value or factor for an elderly applicant using that same definition and the creditor has to use.
I'm using terms now directly from the regulation and empirically derived credit system, which considers age that is demonstrably and statistically sound in accordance with the rest of regulation being. I don't want to get into too much discussion about this, but I can tell you in my time at NCUA. Okay. I never saw such a system. There were no, there were, there were credit unions who had standards where there was a minimum age for certain things.
They did not have a way to prove that they, the system was statistically or demonstrably sound, demonstrably easy for me to say sound. So I would, I would exercise caution if you're thinking about doing something like that. And finally. Age can be considered if there's an inquiry for the purpose of determining the amount and probable continuance of income levels, credit history or other pertinent element of credit worthiness.
And there's some, some further fleshing out of that in the regulations. And that same 2022 letter to credit unions that I mentioned with respect to marital status does talk about the age discrimination issue. And what it specifically refers to is this. These are again, things that examiners were finding on a regular basis, and I think they still are and that is where there were automated underwriting systems. That were set to kick out from the automated underwriting system.
Those who are under a specified age. I remember 1 credit union has 3 or 4 different ages, depending on the product. They, they were sent to manual underwriting and what we heard almost in every credit union where we found these was, well, we send them the manual underwriting, but we weren't denying them for for those reasons. The mere fact that someone was being evaluated by a different system because of a prohibited basis was the violation.
And again, the N. C. U. A. was required to refer several credit unions to the Department of justice. Because of those violations, so I would caution you haven't done this recently. Take a look at your policies and procedures and see if there's anything like that in them, because it's a potential problem. Very good. You have a referral to the Department of Justice.
It's not something that NCOA does lightly and it's not something if you're out there in credit union land, you want to have on your resume if you were exactly now, the the referrals themselves. Are not a matter of public record. They do become public if the Department of Justice decides to keep that referral. And handle a case, they will, they will make it public, but until. Unless that is done, it doesn't, doesn't do that. The, the agency does.
Provide the number of referrals per year to other agencies as required by law, but the names are not are not made public. However, you run the risk of D. O. J. keeping 1 of those and. This just as Mark said, it's not something you want. So, all right now, the last 2 prohibited bases 1 is income derived from a public assistance program. Somewhat somewhat obvious if somebody has income from, let's say, disability.
You have a permanent disability or something along those lines, social security income, just the mere fact that the income is not from an occupation, but it's from public assistance of some sort is not enough to deny a person if they're otherwise qualified. However, same as with age. There can be an inquiry, inquiry made to determine the amount and probable continuance of income levels.
If somebody is receiving benefits that have an end date, that can be considered when deciding whether the person has the requisite qualifications credit for a credit, they're going to be able to continue to pay for the duration of whatever the credit is it's being considered. But that's the only reason.
And then finally, the prohibited basis of denying somebody credit or the terms of the credit, not being the same as other people, based on the fact that somebody exercised rights under certain laws. As I mentioned, it's the Consumer Credit Protection Act is the name of the section. Of the federal laws that contain a co and a number of other laws, such as a fair credit reporting act, a fair debt collection practices act or electronic fund transfer act and also the truth and lending act.
So, let's suppose somebody, um, ends up suing the credit union because there is a truth and lending violation. And they lost some money from it somehow or other, uh, and then a couple of years later applies for credit with the credit union, the credit union. Cannot deny the application or change the terms that are being applied for solely because that person sued the credit union under one of these laws. Got it. Yeah, you can't you can't discriminate against me for pursuing my rights. Exactly.
Okay. Well, you know, Joe, there's been a lot to. We've talked about a lot already. I know we got more that we want to talk about, including a second primary function and, you know, special, I think some, some other provisions like the special purpose credit program. And then I think we're going to do a little bit more of a discussion on the referral program to the department of judge department of justice, but this is a good spot to kind of break this one.
If not in two, break it in two thirds on the front end and one third on the back end. So John, I want to thank you. For what you've already said, and let's start back up with a, with a second take on this topic here shortly. Thanks, Jim. Thank you, Mark. You got it. And listeners, I want to thank you for listening to this episode of With Flying Colors. There'll be the next episode in queue will be part two of this topic.
I want to thank you for listening and this is Mark Treichel signing off with Flying Colors. for joining us on this episode of With Flying Colors. Subscribe on your favorite podcast app to hear future episodes where subject matter experts of all varieties will provide tips on how to achieve success with NCUA. If you would like to learn more about how we assist credit unions, check out our services at marktreichel. com.