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Credit Discrimination: 10.9.1 Incidental Consumer Credit

The ECOA notice requirements do not apply to incidental consumer credit.255 However, incidental creditors are required to comply with the general prohibition against discrimination, among other ECOA provisions.256

“Incidental consumer credit” is defined as:

Credit Discrimination: 10.9.2.1 General

The notification requirement applies to applications for business credit but is less strict than for consumer credit applications. There is also one set of rules for relatively small business applicants and another set for larger business applicants. Creditors may, if they choose, comply with the consumer notification requirements for business credit or they may comply with the small business requirements for all businesses.261

Credit Discrimination: 10.9.2.2 Rules for Small Business Applicants

Regulation B contains special notification rules for certain small businesses.265 These rules apply to businesses with gross revenues of one million dollars or less (except for trade or factoring credit),266 applications to start a business, and most applications by an individual for business purpose credit (except that, when an applicant applies for credit as a sole proprietor, the revenues of the sole proprietorship govern).267

Credit Discrimination: 10.9.2.3 Rules for Other Business Applicants

Creditors have the option of complying with an even less restrictive set of notification rules for other business applicants. These different rules apply to businesses with revenues over one million dollars and with respect to applications for trade credit and credit incident to a factoring agreement.271 The creditor may rely on the applicant’s assertion as to the size of the business’s revenue.272

Credit Discrimination: 10.10 Relationship of ECOA Notices to FCRA Adverse Action Notices

The Fair Credit Reporting Act (FCRA) requires notice when a credit report forms the basis of a credit denial.279 Similar to the Equal Credit Opportunity Act (ECOA), the triggering event for an FCRA notice is “adverse action.” The FCRA, however, has a more extensive definition of adverse action than the ECOA. The first part of the FCRA definition of “adverse action” has the same meaning as the ECOA definition.

Credit Discrimination: 10.11 Right to Receive Appraisal Report

The Equal Credit Opportunity Act (ECOA) was amended (effective July 21, 2011) to require that a creditor furnish an applicant a copy of any and all written appraisals and valuations developed in connection with the applicant’s application for a loan that is secured or would have been secured by a first lien on a dwelling promptly upon completion, but in no case later than three days prior to the closing of the loan, whether the creditor grants or denies the applicant’s request for credit or the application is incomplete or withdrawn.

Credit Discrimination: 10.12.1 Preservation of Records

Creditors generally must retain records of credit transactions for approximately as long as the ECOA statute of limitations. A creditor must retain the original or a copy of each of the following documents for twenty-five months following the date it notifies an applicant of the action taken on an application (or of an incomplete application):320

Credit Discrimination: 10.12.2 Preservation of Records in Case of an Investigation, Enforcement Proceeding, or Civil Action

Any creditor with actual notice that it is under investigation or is subject to an enforcement proceeding for a violation of the ECOA or Regulation B—or has been served with notice that a civil action has been filed—must retain all required records concerning applications in general and those concerning other transactions in which adverse action has been taken. These records must be retained until final disposition of the enforcement proceeding or civil action, unless an earlier time is allowed by order of the agency or court involved.332

Credit Discrimination: 10.12.5 Inadvertent Error

Failure to comply with the ECOA record retention requirements does not constitute a violation when caused by an inadvertent error. 345 Inadvertent errors include clerical mistakes, calculation errors, computer malfunctions, and printing errors.

Credit Discrimination: 10.13 Collection of Monitoring Information

Regulation B requires a creditor that receives an application for credit primarily for the purchase or refinance of a dwelling occupied or to be occupied by the applicant as a primary residence, when that dwelling is to serve as the security for the credit sought, to collect information about the race, ethnicity, sex, marital status, and age of the applicant.349 This information is intended to assist private plaintiffs and government enforcement agencies in determining whether differences in treatment due to a prohibited basis have occurred.

Credit Discrimination: 10.14 Self-Testing

The Equal Credit Opportunity Act (ECOA) and Regulation B allow a creditor to investigate its own conduct to determine whether the creditor’s practices are in violation of the Act. If such self-tests are conducted in accordance with the ECOA and Regulation B’s requirements, and if the creditor corrects any violations identified by the self-test, the information developed in the course of the self-test is privileged.356

Credit Discrimination: 4.1.1 Overview

Credit discrimination can be proved in either of two instances: when a creditor utilizes a prohibited factor in making a credit decision or, alternatively, when a creditor uses factors that are not necessarily prohibited or improper but nevertheless have a disparate impact upon a protected group.1 At the same time, credit discrimination statutes are not violated merely because an applicant is adversely treated and the applicant is a member of a protected group.

Credit Discrimination: 4.2.1 Introduction

Discrimination is prohibited if there is a linkage between the discrimination and a prohibited basis such that the creditor’s decision-making process results in individuals being treated differently because of a prohibited basis.

Credit Discrimination: 4.2.3.1 The McDonnell Douglas Burden Shifting Analysis

If the plaintiff does not have direct evidence of disparate treatment, a prima facie case may be established through circumstantial evidence.25 To prove disparate treatment using circumstantial evidence, most courts will require that a plaintiff first establish a prima facie case by showing: (1) membership in a protected class; (2) application for credit for which the plaintiff was qualified; (3) rejection despite qualification; and (4) that the defendant continued to approve credit for similarly qualified applicants.

Credit Discrimination: 4.2.3.3 The McDonnell Douglas Standard in Predatory Lending/Reverse Redlining Cases

In reverse redlining cases, it is critical to ensure that the court uses a modified test for determining whether a prima facie case exists. The key difference in predatory lending cases is that lenders generally grant credit, but on predatory terms. Thus, the traditional third prong of the McDonnell Douglas analysis—that the applicant be denied credit—will not be met. Borrowers may also argue in some cases that they were given a loan that they did not have the ability to repay.

Credit Discrimination: 4.3.1.1 Disparate Impact Cognizable Under Both ECOA and FHA

An alternative under the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) (but not the Civil Rights Acts) to proving disparate treatment is proving disparate impact. Under a disparate impact theory, the creditor may not be treating applicants differently on a prohibited basis, but there still may be illegal discrimination if the effect of the creditor’s practices is to adversely impact a particular protected class.