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Credit Discrimination: 11.9.4.1 Good Faith Compliance

The ECOA states that a creditor is not liable for any act done or omitted “in good faith in conformity” with Regulation B or with the official interpretations, even if the regulation or official interpretations are amended or determined to be invalid.635 The conduct must not only conform to the regulation but must have been in good faith conformity. Regulation B defines good faith as actions based on “honesty in fact” in the conduct or transaction.636

Credit Discrimination: 11.9.4.4 Special Defenses by FDIC and RTC

When a governmental agency such as the Federal Deposit Insurance Corporation (FDIC) or the Resolution Trust Corporation (RTC) takes over a bank, the ECOA still applies to the bank’s pre-takeover transactions. An ECOA violation is normally apparent on the face of the bank’s records—for example, requirement of a spouse’s signature when the credit application shows the applicant is creditworthy.

Credit Discrimination: 11.9.5 Special Defenses to Fair Housing Act and Civil Rights Acts Claims

The Fair Housing Act (FHA) and the federal Civil Rights Acts do not provide for any special defenses. The FHA regulations provide a defense when an entity purchases loans. Such an entity may consider factors justified by business necessity, such as considerations employed in normal and prudent transactions.654 As noted earlier, business justification is an issue in any disparate treatment or disparate impact case as well.655

Credit Discrimination: 10.1 Introduction

Previous chapters have focused on the ways in which the Equal Credit Opportunity Act (ECOA) and other federal credit discrimination statutes may be used to challenge discriminatory creditor behavior. The ECOA and its implementing Regulation B apply more broadly. Creditors may violate the ECOA and Regulation B not only by engaging in discriminatory actions but also by violating any of a number of procedural requirements intended to ensure compliance.

Credit Discrimination: 10.2 Overview of ECOA Notice Requirements

Creditor notification requirements vary depending on the situation7 and this chapter treats each of these different situations separately: (1) applications approved by the creditor; (2) applications in which the creditor makes a counteroffer as to the terms or amount of credit; (3) adverse actions on applications or on existing accounts; (4) incomplete applications; (5) withdrawn applications; and (6) notices of right to review appraisal reports.

Credit Discrimination: 10.3 Notification Requirement for Approved Applications

A creditor must notify an applicant of its decision to approve an application within thirty days after receiving a completed application.9 This notification may be either express or by implication. For example, implicit notification is given when the applicant receives a credit card, money, property, or other requested services.10

Credit Discrimination: 10.4.1 Overview

Sometimes the creditor’s response to a completed application will be to offer to extend credit, but on substantially different terms or in substantially different amounts than those requested by the applicant. Regulation B requires that a creditor notify an applicant of any counteroffer to the credit requested within thirty days after receiving a completed application.11

Credit Discrimination: 10.4.2 Is a Counteroffer an Adverse Action?

The ECOA defines “adverse action” as “a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested.”14 This definition clearly covers the typical counteroffer situation in which the loan the consumer receives at closing is substantially different than the loan requested.

Credit Discrimination: 10.4.4 Written Application Requirement

Another ECOA regulation requires that all home mortgage or refinancing applications must be in writing, as distinct from all other credit applications, which may be made orally.47 Creditor violation of this written application requirement should entitle a consumer to relief.48

Credit Discrimination: 10.5.1 Adverse Actions Involving New Credit Accounts

An adverse action is defined as any refusal to grant credit “in substantially the amount or on substantially the terms requested in an application, unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered.”54 Adverse action occurs whether or not the creditor complies with the requirement to provide notice of adverse action.55

Credit Discrimination: 10.5.2 Adverse Actions Involving Existing Accounts

The issue of when a creditor has taken an adverse action concerning an existing account is somewhat more complex. Termination of an account or an unfavorable change in the terms of an account that does not affect all or a substantial portion of a class of the creditor’s accounts is an adverse action.70 An example of this type of adverse action is the automatic termination of the paid-up account of a recently divorced woman when no other paid-up accounts are terminated.

Credit Discrimination: 10.5.3 Adverse Actions Involving Counteroffers

The Equal Credit Opportunity Act (ECOA) defines “adverse action” as “a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested.”96 Regulation B defines “adverse action” as a “refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressl

Credit Discrimination: 10.5.4.2.2 Reasons must be accurate

The reasons disclosed must relate to and accurately describe those factors actually reviewed, considered, or scored.125 Moreover, no factor that was a principal reason for the adverse decision may be excluded, even if the relationship of that factor to creditworthiness may not be clear to the applicant.126

Credit Discrimination: 10.5.4.2.3 Reasons that must be disclosed when a credit scoring system is used

It is not always obvious what the actual reason for denial of credit is when a creditor uses a credit scoring system, as the system bases the applicant’s score on many different variables.141 Although the credit score is a single number, numerous factors are used to derive that number. The problem is how to isolate the variables that adversely affected an applicant’s credit score, causing the denial of the credit application.

Credit Discrimination: 10.5.4.2.4 When a creditor discloses only the applicant’s right to a statement of reasons

The creditor’s notice of adverse action may either state the specific reasons for the action taken or disclose the applicant’s right to request a statement of the reasons for the action taken and how that request should be made.151 When the creditor discloses the right to request a statement of the reasons, the creditor also must disclose the applicant’s right to have a creditor’s subsequent oral statement of the reasons confirmed in writing.152

Credit Discrimination: 10.6.1 Timing of Notices

Within thirty days of receiving a completed application, a creditor must notify an applicant of actions taken concerning the creditor’s approval of, counteroffer to, or adverse action on the application.155 The application is considered complete once a creditor has obtained all the information it normally considers in making a credit decision.156 The creditor must send notification of adverse action taken on an incomplete application for credit within thirty days of taking the adverse action.

Credit Discrimination: 10.6.2.1 General

The creditor must give the applicant written notification of an adverse action.162 Notice of an approval may be explicit or implicit.163 There is a split among courts that have addressed the issue of whether written notice is required for counteroffers that are not adverse actions.164 In addition, creditors that have acted on 150 or fewer applications during the preceding calendar year may notify the applicant orally.

Credit Discrimination: 10.6.2.2 Electronic Notifications

Regulation B provides for electronic delivery of ECOA notifications.174 The rule was issued in response to the passage of the Electronic Signatures in Global and National Commerce Act (E-Sign Act).175 In accordance with the E-Sign Act, a creditor may provide by electronic communication any disclosure required by Regulation B to be in writing.176 Disclosures by electronic communication, like disclosures provided in writing, must be provided in a cle

Credit Discrimination: 10.6.3.1 Applicants

Creditors are required to notify applicants of action taken. The statute defines an “applicant” as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit or who applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”181

Credit Discrimination: 10.6.3.2 Notice to Multiple Applicants

When there is more than one applicant for credit, the required notification need be given to only one applicant—the primary applicant, if one is apparent.189 There is the possibility of unlawful discrimination in the identification of the primary applicant. A creditor might assume, for instance, that the husband in a married couple is the primary applicant.