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Credit Discrimination: 5.1.1 The Special ECOA Requirements

As a fundamental principle, the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), and other credit discrimination statutes set forth a general rule against discrimination in every aspect of a credit transaction. In addition, the ECOA has specific prohibitions and procedural requirements that creditors must follow in the various stages of a credit transaction. The FHA and federal Civil Rights Acts do not contain equivalent specific prohibitions and requirements but nevertheless apply broadly to all stages of a credit transaction.

Credit Discrimination: 5.2.1 Introduction

Before discussing discrimination specific to each stage of the credit transaction, it is helpful to understand some principles about the general rule against discrimination embodied in the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), the Civil Rights Acts, and other credit discrimination statutes.

Credit Discrimination: 5.2.2 What Is “Discrimination” Under the General Rule?

The term “discriminate” is defined by Regulation B as treating an applicant less favorably than other applicants.2 Consequently, the ECOA prohibits treating an applicant less favorably than other applicants on a prohibited basis at any stage of the credit transaction, ranging from application procedures to terms of the transaction to the subsequent handling of defaults.

Credit Discrimination: 5.3.1 Overview

The first stage of a credit transaction in which discrimination may take place occurs prior to the actual application—i.e., when the creditor takes various actions to encourage or discourage persons from seeking credit from that creditor.13 While most of the Equal Credit Opportunity Act (ECOA) applies only to “applicants,”14 Regulation B does include a pre-application prohibition forbidding creditors from discouraging prospective applicants on a prohibited basis.

Credit Discrimination: 5.3.2.1 The ECOA Standard

Regulation B specifically prohibits any oral or written statement to prospective applicants in advertising or otherwise that would discourage, on a prohibited basis, a reasonable person from pursuing an application.20 Similarly, the ECOA’s general rule against discrimination prohibits advertising and other marketing that discriminates on a prohibited basis as to who is encouraged to apply.21

Credit Discrimination: 5.3.2.2 The FHA Standard

The Fair Housing Act (FHA) explicitly prohibits discrimination in advertising with respect to the sale or rental of a dwelling.35 This prohibition applies to all written and oral notices or statements36 and thus should apply to marketing discrimination.

Credit Discrimination: 5.3.2.3 Other Guidance

An examination procedures guide from the Federal Financial Institutions Examination Council (FFIEC) describes the following scenarios as potential indicators of disparate treatment in marketing:44

Credit Discrimination: 5.3.3.1 Steering

Even if an applicant from a protected group can get past the marketing discrimination and through the creditor’s door, pre-application discrimination may still take place in the creditor’s office. One means of discouraging applicants on a prohibited basis is a practice called “steering.” Steering occurs when a loan officer refers prospective applicants away from one type of product or market (for example, a prime product) to another (for example, a subprime product).86

Credit Discrimination: 5.4.1 General

The next stage of the credit transaction involves the procedures for application for credit.107 In general, under the Equal Credit Opportunity Act (ECOA), there can be no differences in the application procedures if those differences are on a prohibited basis.108 The Fair Housing Act’s (FHA) general rule against discrimination also prohibits such discrimination in housing financing.

Credit Discrimination: 5.4.2.2 The Home Mortgage Exception

Applications must be in writing when credit is used to purchase or refinance the applicant’s principal residence and when the residence is taken as security for the loan.112 This requirement assists federal supervisory agencies in their enforcement of the ECOA and the FHA.113

Credit Discrimination: 5.4.3 Providing Disparate Levels of Assistance in the Application Process

Discrimination in the application process may involve allegations that a lender requested more—or different—types of information from or about protected class applicants, or provided disparate levels of assistance. The challenged conduct must be shown to be the result of disparate treatment or disparate impact.117 Most credit discrimination appears to occur in the context of applicants who are marginally qualified.

Credit Discrimination: 5.5.1.1 Introduction

There are a number of special Equal Credit Opportunity Act (ECOA) requirements and prohibitions concerning requests for information, especially information relevant to the prohibited bases. These requirements specify that various types of information may not be requested or may be requested only in certain situations.

Credit Discrimination: 5.5.1.2 ECOA Restricts Creditor from “Requesting” Information About an “Applicant”

An important aspect of the general rule regarding prohibited requests for information is the definition of the term “applicant” because the prohibitions cover only those information requests made about “applicants.”139 Regulation B defines an applicant as including “any person who requests or who has received an extension of credit” and “any person who is or may become contractually liable regarding an extension of credit.”140 Regulation B defines “contractually liable” as being expressly ob

Credit Discrimination: 5.5.1.4 Should Regulation B Permit or Require Creditors to Request Information About Prohibited Bases?

In 1999, the Federal Reserve Board (FRB) proposed removing the prohibition on seeking information about an applicant’s race, color, religion, national origin, and sex for non-mortgage credit products.159 This change was made in response to comments from the Department of Justice (DOJ) and other federal financial enforcement agencies that the enhanced ability to obtain data on race and ethnicity would aid fair lending enforcement, particularly with respect to small business lending.160