While a specific number of reasons is not mandated, more than four reasons is probably not helpful. And the reason is because if somebody has a significant number of problems, it's probably going to be hard for them to deal with all of them, but it would be much more beneficial for those people to know that the 3 or 4 most significant problems with your credit are ABC and D 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 at marctreichel. com to find out more. Hey everyone.
This is Marc Treichel with another episode of With Flying Colors. I'm back again with Joe Goldberg. Joe, you ready for part two? Absolutely, Mark. All right. Well, Joe, I'll keep your intro, your bio a little bit shorter. Joe's been an attorney for 40 years. He's now consulting and doing a few other things. He spent eight years at NCUA. And he's a consumer compliance guru of sorts.
And we are going to jump back into ECOA, Reg B and a few remaining topics on this that we didn't cover in part one, Joe, the microphone is yours. All right. Thank you very much, Mark. Then in the first part of this, we talked about the background of ECOA and then we went through. What I characterize is one of the two primary purposes of the law, which is to prevent discrimination.
And now we're going to look at the second primary purpose, which is to encourage the informed use of credit, which is a stated purpose that Congress put right in the Equal Credit Opportunity Act. And the way that it did that is that it required. A creditor to provide a notice to an applicant who is either denied credit or received credit on terms that were not as favorable as the terms that the person applied for.
Many of you may be familiar with the term adverse action notice, and that's what this, this notice is. It's a notice that adverse action was taken on the application. So, let's take a look at what, what is done either through the act itself or through Regulation B. So, the purpose of this is to inform an applicant of the reasons for the adverse action. Why was the credit denied? Why was it revoked? Why was it provided?
Obviously, the revocation would be existing credit, or was existing credit adversely changed? Or was the credit applied for originally approved, but approved with less favorable terms than those requested. So it's the why, here's what, here's why we didn't want you to be our customer. The adverse action notices must provide specific reasons in some level of detail. For example, you cannot just say applicant does not meet our lending standards. It's just not sufficient.
First of all, a borrower is not going to know what your lending standards are. And which one is it that they didn't meet? It's just simply isn't informing the applicant of the reasons for the adverse action. So, uh, so, uh, Joe, if they have a debt to income ratio of X percent. And you were at X plus 5%. You could say that your obligations and debt ratio is that would be, would that be something that would be specific enough to meet this right? That would be specific.
There's not a need to put the exact numbers that you're looking that the credit union looks for what the persons were just the fact that the debt to income ratio. However you want to term it was too great to, to, for the credit union to provide the credit. Got it. All right now, this is all the way the regulation approaches the adverse action notice. It does say that the notice should contain the principle reasons for the adverse action.
And the reason that it discusses this is there's a problem with not providing enough information, but there's also a problem with providing too much information. What the official interpretation of regular regulation be states is that. While a specific number of reasons is not mandated, more than four reasons is probably not helpful.
And the reason is because if somebody has a significant number of problems, it's probably going to be hard for them to deal with all of them, but it would be much more beneficial for those people to know that the 3 or 4 most significant problems with your credit are ABC and D that then gives that borrower or applicant.
The ability to start to address the credit deficiencies, and it makes sense because I didn't yeah that I learned that today that I was today years old, understanding that but that makes sense that you don't want to pile on you don't want to say here's the 47 reasons. What were the main reasons, and then they can look towards resolving those. Exactly.
If, you know, if the main reason is your income is too low, or if your debts are too high, those whether whether the person can actually address those is debatable. But the fact is, for for most people, that's going to be the type of problem that if it was alleviated. We get them into consideration for some type of credit, maybe not, maybe under different terms, but so, yeah, you want to be able to, as an applicant, know what are the few things I can do to try and better my credit.
And again, for some people, it may be beyond repair, unfortunately, but for the great number of people, it's not. And if they know what they can, they have to address, they can take some steps to, to address that. So now there's, there's some wrinkles to this, for example, if the credit union says, we can't give you this loan on these terms. However, we can give you this car loan at X plus 2%. Interest rate instead of what you asked for.
If the person accepts the counter offer, then, then they're okay. There, there is no need for adverse action because the credit has been consummated. Also, if there's an automatic denial based on one factor in an AUS, automated, automated underwriting system, you don't have to, it, it also permits the creditor for, to provide only one notice where the Fair Credit Reporting Act. Also requires an adverse action notice.
Again, some of you may be familiar with the fact that if a credit report or a consumer consumer report as a proper terminology is used. In considering whether to extend the credit. The fair credit reporting act also has an adverse action notice requirement so that if the credit is denied, or the terms are less favorable that applied for. And a credit report was used in that determination. There has to be an adverse action notice under the F. C. R. A. Interesting.
The, the ECOA Reg B, the CFPB said a few years ago, and then I say a few, it may have been six, seven, eight years ago, that, The use of a single notice for both will satisfy ECOA. So, and there, I believe that there's even a form, a sample form in the official interpretation of the regulation. Am I, am I right? Excuse me, that, that the applicant can, has a way to say, hey, if, if, if you're going to give me an adverse action. I'd rather get it in hard copy or electronically.
Are, am I right about that? And then are, is the institution required to do both? The institution can actually give an oral notice, but you won't find that very often because the, what you have to say orally is pretty much what you would have to put in a written notice and it's a little bit complicated to have somebody sit down there and, you know, sit and read this orally to a consumer. So. The answer is yes.
And in fact, the person doesn't have to provide the notice, but has to say that the notice is available. Excuse me. The creditor doesn't have to creditor can say the notice is available. And then the person can ask for it. But it really doesn't make sense for a creditor to try and give the reasons. Orally, you run a real risk for compliance purposes.
Consistency would be hard to maintain and then it also could get, you know, into a debate and you could end up having conversations you wouldn't even want to contemplate having. Exactly. Exactly. And then the last thing I do want to say is that there's also a requirement for something similar for business applicants. The standards are different. I don't want to go into them, but they're, they're. Pretty easy to read in the regulation. I don't think we need to go into him at this time. Got it.
All right. Now, you know, we talked about the 2 significant provisions, but there are some other provisions of a coa that everybody should know about. And 1, I did mention a little bit earlier, and that is a special purpose credit program, and this is a carve out that allows creditors. To meet the credit needs of specified classes of persons, and these are for programs for those who are economically or socially disadvantaged.
Either consumers or commercial enterprises, there are rules that govern these, there actually is sort of one set of rules for for profit, financial institutions, and then another set for nonprofits, they, they allow this type of credit to be extended. And there has to be, it's one of two things.
It's a credit assistance program that's expressly authorized by federal or state law for the benefit of an economically disadvantaged class of persons, or a credit assistance program offered by a not for profit organization for the benefit of its members. Or an economically disadvantaged class of persons credit unions fall under the not for profit organization prong.
So, you know, there is consideration of the membership and the credit union can target a portion of its membership if it is specifically an economically disadvantaged class of persons. Again, if you're interested in looking at this, I know that I believe in 2022, NCUA sent a letter to credit unions describing the availability of these programs to credit unions and encouraging some to look at the possibility of implementing some of these programs if it was appropriate for their membership.
Interesting. Yeah, I'll have to take a look at that letter. I'm not familiar with that if that's out there. Thank you. It went out, I believe it went out at the same, may have been something other than a letter, a formal letter to credit unions, but I know that whatever was sent out was done around the same time as banks put out something similar, you know, banks. Yeah, it probably was a letter to credit unions. That would be the natural way to do that. Yeah. All right.
So, we talked in the first part of this presentation about the referring of credit unions to the Department of Justice for violations of ECOA. There is a provision right in ECOA, it's section 1691E, and then in parentheses, it's subsection G, that requires a financial regulator, Federal financial regulator to refer to the Department of justice. Institutions under its supervision when there is a reason to believe that the institution has engaged in a pattern or practice of illegal discrimination.
And I mentioned in this, the 1st, part of this presentation that has done so for age violations violations for discrimination based on the prohibited basis of age. And also on the prohibited basis of marital status, at least. During the time I was there, the Department of Justice returned all of the referrals, mostly because they felt that the NCOA, as an agency, had properly handled the matters internally, and there was no need for the DOJ to be involved and to file an action.
In 1996, DOJ issued guidance. To the federal banking regulators, and I use that term in its broad sense, because included in the title of it is identifying lender practices. That may form the basis of a pattern or practice for referrals to the Department of justice. It's publicly available. It's still in, it's still in play, DOJ considers it to be still an active guidance if you will, NCUA uses it, it's available to the, to the credit unions. It might be on NCU's website, NCUA's website.
I'm not positive. I'll talk about that in a minute where things are, but I know that DOJ has it publicly available. Got it. It's actually fairly interesting reading because it does give you some guidance on how to avoid being caught up in a problem with a COA that results in a referral. All right, so, and I did note that NCOA has done that is now become a regular thing. Unfortunately, there are a number of credit unions who just can't seem to get this either age discrimination or marital status.
Issue fixed. So some of the others, as you said, as you said, the word is required. If NCOA comes across the fact pattern that fits, they have to refer it to the DOJ. It's not, it's not a, there's not an art to that determination. If the facts are the facts are the facts. And if there is a discrimination, it must go to DOJ and, and then NCOA can tell the credit union to fix it or the credit union can respond and fix it. And it's those kinds of things that DOJ weighs once it's referred to them.
Right, and generally, I can tell you my experience was we would have conversations with credit union management and explain the standards that are in that DOJ publication, which includes such things as restitution having been made the problem already being corrected and, you know, we would point out that abiding by those.
Provisions and that DOJ guidance would go a long way to the DOJ, not keeping referrals and it's, it's, it's just makes sense that you'd want to take care of your members anyway, if there was any issue that, you know, that similar to similar to showing remorse at sentencing.
To some extent, to some extent, if, if, if it's, if it's sincere, yeah, I wasn't, I, I was just trying to put it into, you know, I'm not a lawyer, but I'm putting it into the real world ramifications and analogies that I can think of. But anyway, all right. And in, in, in defense of all the credit unions we dealt with to a credit union, each one said we had no idea this is not right. We shouldn't, we don't want to do this to our members. How do we make it right? And it's easy.
I mean, you have something, we've always done it this way, right? It's been in there for five years or 10 years. And then when you, and so it goes in and raises the question and you look at it through a different lens, you can go, Oh my gosh, I didn't realize that. How do I fix it? Oh, yeah, there were, there were definitely credit unions where there was nobody left in the credit union who knew when that practice had been implemented. So get that. Yeah. All right.
So some of the other requirements of a COA that haven't yet been covered is that it does require a creditor to provide a written copy of an appraisal or offer. The appraisal that was used in a credit decision and at no cost for the copy to the applicant, just it's a requirement. There are also in this kind of dovetails into what we just talked about with the D. O. J. referrals to some extent. There are incentives built into.
The for self testing and self correction, it can eliminate a finding of a violation. Uh, if a credit union on its own self tests, that could be either internal or the use of a, you know, a 3rd party doing some type of external audit and as a means of testing and self correction. Um, and I know that there have been some credit unions who self reported to when I was there saying, hey, we found this. We've corrected it. What do we do?
And under a would not have been a problem because as long as the standards were met for self correction and self testing. So that's again, that's an incentive. To the. Credit industry as a whole to do things right and to get things right. There is a brand new, um, section of a co op that essentially, let's see, the effective date is going to be April, excuse me, August 29th of 2023, although the compliance date as well after that, there is a separate.
Podcasts that goes into detail on it, but it refers there. Excuse me. It requires. Those who lend to small businesses to collect data similar to hum the data and beyond that for every application. And report that data to the CFPB, um, as long as you, the creditor meets the threshold of threshold is at least 100 originations to small businesses for each of the prior 2 years that would require report collection reporting in the 3rd year and detailed. Joe, let me interrupt there for one second.
The, that podcast is podcast number 111, which is, which is published and was published on June 13th. So, all right, if you that'll this, the one we're recording today will come after June 13th. So if you're listening to it, and you want to hear the podcast Joe is referring to on the small business loan data collection, it's number 111 published on June 13th. Great. Thank you for that, Mark. Great. Um, enforcement for federal credit unions.
The NCOA is the enforcing agency for ACOA for federally insured state credit unions and for non federally insured state charters. The Federal Trade Commission is the enforcement agency. Now, the Act also includes provisions for private actions against a creditor who violates ACOA. The, the act allows for the recovery of actual damages for punitive damages, up to 10, 000 for a case involving an individual class actions are not prohibited.
And in fact, there is a provision under the punitive damages section that governs how much the punitive damages can be. And just so you know, it's the lesser of. 500, 000 or 1 percent of the net worth of the actor. If there's a punitive damages in a class action for class actions, if there are actual damages, there's not a limit to the actual damages. And also there can be injunctive relief and an award of attorney's fees and costs.
Joe, on, on class actions, um, you know, just, this is just kind of a something that jumped into my head and not related to this particular topic, but a class action lawsuit for, um, you know, your, your cable company overcharged you a dollar for. Something over 10 years and you, you get a notification that you had service by this cable company and, you know, you can, you can opt in as part of the class action. And then 2 years later, you get a check for 4 dollars and 76 cents.
And, but the law firm got a big settlement, right? Um. Any thought, and I know that what, what's being protected under these laws here and the ability to have these class action lawsuits make sense because, because of the. The if there's an intent to do something very bad against people that that kind of protects that from happening, but can you think of examples?
And I know I'm kind of putting you on the spot here, but, you know, the example of where I got a check for 4 and 12 cents to me seems to be almost an inappropriate use of class action lawsuits. Can you in your history of what you've seen out there in this arena? Can you think of some class action lawsuits that? That, um, that, that were, were worthy and actually ended up getting a reasonable settlement for, for people there are attorneys.
Yeah, I can't, I can't come up with one off hand, but I was involved in several class actions in my private practice. And what you're raising is an argument that sort of has been there historically. The, the, the issue is. Is it okay to steal a million dollars from one person or it's or it's not okay, obviously, to steal a million dollars, right? One person, right? What is the materiality?
It's okay to steal 10 million, you know, dollars from 50 million people because you, if you file a class action, everybody only gets 50 cents, but, you know, if you don't have the class action process, then the, the business that acts illegally gets to keep. The profits from the legal activity, I guess it's, it's like having a referee or an umpire, right? You gotta have someone there to call balls and strikes. Yeah, exactly. Exactly.
And you know, people complain about the attorney's fees, which may or, you know, um, sometimes they're exorbitant, sometimes they're not, but that, that sort of also fits into the whole concept of if there's no penalty for, you know, The, the actor legally, look, there are some class actions that are questionable, whether there is a violation and they get settled because it's cheaper to settle. You know, I understand that. But there are great many who of class actions.
That have a lot of value and, you know, it stops illegal activity and it does, um, it, the profits are not, they don't stay with the, the bank robber, you know, they, they go back to somewhere. At least they don't get to keep the fruits of their illegal activity. Perfect. Perfect explanation. I'm glad I asked the question. Yeah, it's, it's, it's not a, it's not a perfect system in, you know, but it's what we have.
And to be honest, those, a lot of those types of class actions are things that a regulator. Could handle if the regulator had 10 times as many people working in the field, of course, nobody wants to do that. So class action sort of takes the place of a regulator in a lot of ways. Interesting. That's I like, I like how you frame that too. That's that's that's good. Yeah. All right.
Now, quickly, I just want to talk about, um, because this is always important is what can the credit union do to make sure it's in compliance with ECOA and the regulation. 1st thing is no law be familiar with the Cohen regulation be and I'll talk about some resources for that. Um, make sure the compliance management system is sufficient. I know for a lot of smaller credit unions, if they even have somebody who's dedicated to consumer compliance, that that can be a stretch.
And having somebody who would be dedicated to fair lending is just, you know, beyond, uh, beyond comprehension. I mean, the staff is small and I understand that, but assuming it's very important to have some type of compliance management system in place. So that somebody is looking at these functions within the credit union things that also apply to this are training.
Those who are engaged in lending have to have training on a somewhat regular basis and fair lending, but not just those people, there have to be those who have play any role in the credit making and improving decision of the process, but also management because management has to be able to know that the CMS staff and the, the credit making Staff, whoever the lending staff is that they are also acting properly.
So there has to be proper oversight within the credit union and you need to train the people who are responsible for the oversight. There also has to be oversight of third parties. You know, unfortunately, so many credit unions, not just credit unions, all the financial institutions use third party systems for a lot of the lending process. Um, and for better or for worse. The, the creditor itself is responsible for the acts of the 3rd party.
So you have to have some ability to, um, have oversight over the indirect lenders or the vendors, whoever it may be. And again, I talked earlier about self testing. You know, audits and self testing are ways that you can accomplish that type of oversight as well. You can test to see if what's happening is compliant with the requirements of ECOA. Finally, in terms of resources on NCUA's website, there is a Fair Lending Guide. NCUA sends out regulatory alerts and letters to credit unions.
We talked about this, referred to some of them in this and the previous COA podcast. There's a reason that they do that. NCOA will only send out these letters or regulatory alerts if there's something significant that's taken place or will be taking place. So that's a clue right there that if it says compliance or deals with something in compliance and you are involved in compliance, you need to read it. That's a great point. That's a great NCOA is seeing trends.
Or irrespective of that, NCOA is going to start looking at something because a lot changed or because they've decided to pocket a certain area of potential law. Exactly. And then finally, on the NCUA website, there is a, what's called the financial, excuse me, Federal Consumer Financial Protection Guide, which is a collection of the exam procedures for all the different areas. And there is 1 for ACOA.
So I would urge you to take a look at that because it has some helpful sections that can give you some guidance on, it'll tell you what the examiners are looking at. When they go out in the field, the fair lending examiners, especially, and finally, I would recommend you take a look at the CFPB's website, consumerfinance. gov is the website, but find your way to the fair lending section because they have a number of fair lending resources, including those on ECOA.
Fantastic Joe, a lot, a lot, a lot to unpack here, a lot, a lot of good information for our listeners. And Joe, I want to thank you for being, for sharing your, your wisdom here with my listeners today. Good. Thanks for having me, Mark. You got it. And listeners, I want to thank you for listening. I hope you'll listen again soon. This is Mark Treichel signing off with flying colors.
Thank you 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.