Part One. How does the Equal Credit Opportunity Act affect your business?
If you're new to the lending business, you've probably heard of the Equal Credit Opportunity Act. The law, which was enacted in 1974, is designed to protect borrowers from discrimination.
The law has changed quite a bit over the past 40 years or so. In this two-part series, we'll outline which ECOA regulations you should keep in mind when extending loans to customers.
"You cannot deny a creditworthy applicant a loan if he or she receives public assistance."
The basics of the ECOA statute
The primary purpose of the law, according to the Consumer Financial Protection Bureau (which enforces the law), is to ensure that all businesses extending any form of credit "make credit equally available to all creditworthy customers" without regard to the borrower's sex, marital status, race, color, religion, national origin or age.
In addition, you cannot deny a creditworthy applicant a loan solely because he or she receives all or a portion of his or her income from some form of public assistance. So, if a borrower receives food stamps or cash benefits, you can't deny that person a loan if there are no indications that he or she may be incapable of handling a loan responsibly.
One stipulation of the law clarifies that a lender cannot deny someone a loan if that person has "in good faith exercised any right under the Consumer Credit Protection Act." The CCPA consists not only of the ECOA, but also the Truth in Lending Act, Fair Credit Billing Act and the Home Equity Loan Consumer Protection Act (HELCPA).
Obviously, this leaves a lot of ground to cover, but here's a quick example of how someone could exercise his or her rights. According to Debt.org, HELCPA requires lenders to reveal critical information to homeowners before setting up home equity loans. If a lender forgets to do so, the borrower could take legal action against the former party. If you were to find out this transaction occurred, it would be illegal for you to judge the credit applicant based on this information alone.
Disparate treatment and disparate impact
The ECOA also holds lenders liable for discrimination if the CFPB finds evidence of disparate treatment or disparate impact.
Disparate treatment is pretty straightforward. This occurs when you treat an applicant differently based on any of the prohibited features we outlined above (race, sex, nation of origin, etc.).
Disparate impact, however, is a bit more complicated. The ECOA states that disparate impact transpires when a creditor applies a neutral lending policy that negatively affects certain demographics. At first glance, this regulation would seem unfair to creditors, but this feature only applies when the policy you enforce isn't necessary for you to conduct business. Disparate impact is actually a topic of much discussion among lenders, employers and legislators.
The regulations highlighted above state what you have to keep in mind when lending to consumers, but which steps should you take when extending credit or providing loans to customers? In Part Two of this series, we'll outline a few processes and safeguards you can apply when engaging customers within your lending business.