October 11, 2022

The Equal Credit Opportunity Act (ECOA), as implemented by Regulation B, is currently the most expansive and far-reaching fair lending law in the United States.

Initially passed in 1974, the ECOA was aimed at prohibiting lending discrimination against women on the basis of sex and marital status. Not long after, in 1976, Congress amended the ECOA to expand its application to further prohibit lending discrimination on the basis of race, color, religion, national origin, age, and the receipt of public assistance income. And today, the law is interpreted to include prohibitions against discrimination on the basis of sexual orientation, gender identity, and non-conformity with gender stereotypes.

This white paper provides an overview of the scope of Regulation B, the “special purpose credit” exception, and the theories of liability under Regulation B, as well as suggested practices financial institutions should adopt to mitigate the legal and compliance risks presented by Regulation B.

Scope of Regulation B

Generally, Regulation B reads: “A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.” 12 CFR 1002.4(a).  While, as discussed above, the evolution of the ECOA has led to dramatic expansions in the definition of a “prohibited basis,” this broad prohibition against varying types of discrimination is not the only thing that makes this law so expansive.

Unlike other fair lending laws (namely, the Fair Housing Act), the ECOA is not limited in its application to certain kinds of credit or groups of persons. Accordingly, the ECOA applies (1) to all forms of credit, including credit cards, loans, mortgages, or any other right to incur debt and/or defer payment, and (2) to both consumers and businesses alike.

Additionally, the law applies to all “credit transactions,” prohibiting discrimination during any part of the credit process. Regulation B defines this as “every aspect of an applicant’s dealings with a creditor.” 12 CFR 1002.2(m). Therefore, whether responding to applications for credit or credit that is already extended, requesting information, performing investigations and collections, or determining standards of creditworthiness or terms of credit, a creditor must treat all similarly situated individuals the same and must not consider any prohibited basis in making any credit decision.

The definition of “creditor” is also more expansive than other laws. For example, in Regulation Z, the term creditor is generally restricted to the party or person to whom the obligation is initially payable. However, Regulation B is much more inclusive, imposing its restrictions on “any person who, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit.” 12 CFR 1002.2(l).  Regardless of whether an individual or entity is owed certain debt, if they are involved in the credit decision process, they may be considered a “creditor” for purposes of the ECOA. Further, the ECOA applies to all methods of credit evaluation, whether the review was performed by an individual directly or any credit scoring technology (i.e., “big data”).

Regulation B’s “Special Purpose Credit” Exception

Notwithstanding Regulation B’s prohibition of discrimination, Regulation B authorizes creditors to extend “special purpose credit” to applicants who meet eligibility requirements for the benefit of their members or the benefit of an economically disadvantaged class of persons; the term “special purpose credit” is not defined in Regulation B. 12 CFR 1002.8.  And most state laws provide an exception from their anti-discrimination laws, at least to the extent of the federal authorization in Regulation B.

Regulation B exempts a creditor acting pursuant to a “special purpose credit” program from certain prohibitions that would otherwise apply. For example:

  • A refusal to grant credit to an applicant is not a violation of Regulation B if the applicant does not meet the eligibility requirements under a special purpose credit program.
  • All program participants may be required to share one or more common characteristics (for example, race, national origin, or sex) so long as the program was not established and is not administered with the purpose of evading the requirements of Regulation B.
  • If participants in a special purpose credit program are required to possess one or more common characteristics (for example, race, national origin, or sex), the creditor may request and consider information regarding those common characteristic(s) in determining the applicant’s eligibility for the program.
    • This permits the credit union to request and consider certain information that would otherwise be prohibited by Regulation B to determine an applicant’s eligibility for a particular program.
    • Nonetheless, if the creditor rejects an application because the applicant does not meet the eligibility requirements (common characteristic or financial need, for example), it must notify the applicant of action taken as required by Regulation B (i.e., adverse action notices).

Regulation B does not provide specific standards for “special purpose credit” programs administered by all types of creditors.  However, it does authorize the Consumer Financial Protection Bureau (CFPB) to issue standards for bank programs, and the CFPB has done so.  While the CFPB bank standards do not apply to all creditors under Regulation B, the bank standards provide very useful guidelines for how creditors should document the selection process for the economically disadvantaged classes of persons to whom they will offer a special purpose credit program.

Therefore, we recommend that all financial institutions establish and administer any special purpose credit program pursuant to a written plan that, in compliance with the CFPB bank standards, contains the following information: (1) The class of persons that the program is designed to benefit; (2) The procedures and standards for extending credit pursuant to the program; (3) Either (a) the time period during which the program will last or (b) when the program will be reevaluated to determine if there is a continuing need for it; and (4) A description of the analysis the financial institution conducted to determine the need for the program.

If you need additional information or would like assistance in developing a written plan for your “special purpose credit” programs under Regulation B, contact us directly.

Theories of Liability under Regulation B

The ECOA has three principal theories of liability: (1) Overt discrimination; (2) Disparate treatment; and (3) Disparate impact or effect. In short, not only may a creditor be held liable for intentional discrimination on a prohibited basis, but also unintentional discrimination in the treatment of individuals on a prohibited basis (without a legitimate and nondiscriminatory reason for the differing treatment), and policies or practices that (although neutral on its face) lead to discriminatory outcomes on a prohibited basis.

In sum, as a result of the broad protections against discrimination in the credit process, for both consumer and business lending, the scope of the ECOA, as implemented by Regulation B, is far-reaching and should not be overlooked as an area of legal concern and/or compliance risk.

Complying with Regulation B

In efforts to mitigate the legal and compliance risks presented by Regulation B, financial institutions should:

  • Develop detailed procedures to train staff and monitor practices related to credit transactions.
  • Establish policies and procedures for “special purpose credit” programs and document each “special purpose credit” program pursuant to a written plan as set forth in the CFPB bank standards.
  • Review all marketing and other lending materials to ensure such materials do not exclude or discourage applicants on a prohibited basis. Consider how all marketing decisions might deter or prevent consumers from knowing about or applying for credit offers, including, but not limited to: content and placement of an advertisement, media, languages, website content and availability, geographic selections, and prescreened solicitations and offers.
  • Review use of social media to ensure all solicitations and communications comply with Regulation B and the financial institution is not requesting, collecting, or otherwise using in its credit decisions any information relating to a prohibited basis that may be available through such social media platform.
  • Conduct periodic assessments of whether transactions, individually or in the aggregate, have a disparate impact on one or more prohibited basis.
  • Conduct periodic assessments of data analytic tools and technology (“big data”) used in performing credit decisions.
  • Include contractual protections to ensure third party service providers will perform any credit-related services in compliance with all applicable laws and will not discriminate on a prohibited basis.

By implementing a strong compliance program and including contractual protections in agreements with your financial institution’s third party service providers, your financial institution will be in a position to avoid the common pitfalls creditors face in complying with Regulation B and the ECOA.

Contact us for more information.

Baldini Lang LLC has extensive experience drafting and negotiating vendor contracts for financial institutions and assisting clients in building risk assessment programs and policies to comply with their legal requirements and establish best practice standards.

© 2024 Baldini Lang LLC. This material is a general update from Baldini Lang LLC and is not intended as, nor should be considered, legal advice. To obtain legal advice from Baldini Lang LLC, you must first establish an attorney-client relationship with the firm in writing. This material may not be used by any party in any manner without the express written permission of Baldini Lang LLC, PO Box 270746, West Hartford, Connecticut 06127.

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We aren’t your typical law firm.

Unlike traditional law firms, we do not maintain extravagant offices or a large staff, or otherwise incur high overhead expenses that get passed on to clients.

Instead, we leverage modern technologies and focus on managing costs while still providing high-quality legal advice.