Equal Credit Opportunity Act (ECOA) - Chapter 10 Flashcards
ECOA: The Equal Credit Opportunity Act, Regulation B
The Equal Credit Opportunity Act (ECOA, Regulation B) was enacted by Congress in 1974 to address the issue of discrimination in lending practices. While the act of extending credit is discriminatory by nature, since some consumers qualify, and others do not, the discrimination has not always been based on qualifications alone.1
In the past, specific minorities found it difficult to obtain mortgage financing due to discrimination based on factors such as race, creed, or color. ECOA was added to the Consumer Credit Protection Act (CCPA) as Title VII of the existing law to eliminate the discriminatory treatment of consumers who apply for loans.
The purpose of ECOA is to promote the availability of consumer credit to all applicants by prohibiting credit decisions based on race, color, religion, national origin, gender, marital status, or age. The Act also prohibits credit decisions made based on an applicant’s income being derived from any public assistance program or based on an applicant having exercised their rights under the CCPA. ECOA is overseen by the CFPB.
Under the rules of ECOA creditors cannot make a loan with unfavorable terms or deny credit to someone for any of the following reasons:
- Age
- Race, Color, Religion, National Origin, Gender or Marital Status
- Health Status
- Participation in credit counseling
- Passive sources or public assistance, alimony, or child support for income
- Property location
4 General Permissible Acts Under ECOA
• Inquiries regarding race, ethnicity, gender, immigration/citizenship status, marital status or age for federal monitoring programs in compliance with fair lending laws or to determine if the borrower is eligible for special programs.
- Inquiries relating to a borrower’s marital status if one of these reasons apply:
* The purpose is to include a spouse in the credit transaction.
* The credit transaction is in a community property state. The purpose of the inquiry is to learn if the borrower has a spouse whose signature must be obtained on the security agreement for the lender to be able to foreclose under the property laws of the state in which the security property is located. - The borrower uses their receipt of alimony or child support as a basis for qualification and repayment
- Inquiries about whether the borrower’s income is derived from a public assistance program (for verifying the probable continuance of income when such income is being used to qualify for the mortgage loan).
- Inquiries regarding an elderly borrower’s age (to qualify the borrower for a program that is in the borrower’s favor, such as a reverse mortgage).
The Nine “Prohibited Factors” under ECOA
The lender may not discriminate based on nine prohibited factors. These prohibited factors include:
- Gender
- Race
- Color
- Religion
- National origin
- Marital status
- Age
- Whether any or all an applicant’s income comes from any public assistances program (including Social Security)
- Whether the applicant has, in good faith, exercised any right under the Consumer Credit Protection Act e.g., participation in credit counseling
Circumstances When It Is Acceptable To Deny Credit under ECOA
It is acceptable to deny a loan or credit to an applicant if the applicant does not qualify based on qualifying criteria prescribed within the loan or credit program. These criteria may include:
• Income
• Loan to value ratios
• Credit history
• Collateral
• Age (in cases of reverse mortgages or minimum age requirements to enter into a binding contract)
Overt Evidence
Overt evidence of credit discrimination occurs when the behavior in question is obviously discriminatory. An example of overt evidence of discrimination would be a sign hanging in the front window of loan originator’s office that said, “We Don’t Write Loans for Women.”
Disparate Treatment
Disparate treatment in terms of credit discrimination is demonstrated when a lender treats an applicant or borrower differently based on one or more of ECOA’s prohibited factors.
Disparate Impact
Disparate impact differs from disparate treatment in that seemingly legal behavior on the part of the creditor has a negative effect on a group of people protected under the nine prohibited factors of ECOA. Disparate impact typically needs broader scope to be revealed. An example of disparate impact might be when members of a
community who are considered a minority are legally denied credit due to low qualifications, but as a result no one in the community can acquire financing.
Example Of Disparate Treatment
XYZ credit agency offers to originate mortgages for residential borrowers. A male named Steve arrives at XYZ’s offices to apply for a mortgage. He is greeted by an XYZ staff member and asked to take a seat in the waiting room. A female named Mary arrives at XYZ 15 minutes later and expresses the same intent as Steve - to apply for a mortgage. She is immediately ushered into the back office by the staff and meets with a loan originator. An hour later Mary concludes her business and exits the office. As Mary leaves another female, Susan, arrives and requests to meet with a loan originator to apply for a mortgage. Susan is escorted into the office and Steve remains sitting in the waiting room.
XYZ is exhibiting disparate treatment by allowing the women to apply for credit while treating Steve differently even though they all came to XYZ seeking the same service.
Notice of Action Taken
Whenever a specific decision is made in determining the applicant’s credit application status, an action must be taken. When such action occurs, a disclosure called the Notice of Action Taken is required to be delivered to the applicant. Types of action include:
• Credit is approved / counteroffer made
• Application is incomplete
• Credit offer is unused / not accepted by the applicant
• Credit is denied
Adverse action
Is defined under ECOA as a denial or revocation of credit or a change of terms of existing credit. Typically an applicant may be denied credit (and thus experience an adverse action) when one or more of the following characteristics do not meet the lender or program’s qualifying standard: • The consumer’s creditworthiness • Credit standing • Credit capacity • Character • General reputation • Personal characteristics • Mode of living
Example Of Adverse Action
Jack applies for a mortgage loan and after reviewing Jack’s credit report the lender decides not to extend credit to Jack. The lender made this decision based on Jack’s low credit score. Because this is an adverse action, the lender provides Jack with an Adverse Action Notice telling Jack that his application for credit has been denied and the circumstances involved in the denial.
ECOA Valuation Rule
Because property value and appraisals serve as a key factor in qualifying the borrower for credit, ECOA’s Valuation Rule requires that a copy of the appraisal be provided to the borrower as soon as the MLO has finished processing the report. The borrower will be notified of this right though a disclosure called the Notice of Right to Receive an Appraisal. The borrower can waive their right to immediate delivery, but they will still receive it with their closing documents.
Making the appraisal available is helpful for both the MLO and the borrower. One of the most significant challenges our industry faces is incorrect property value estimates by applicants. In many cases, borrowers believe their home to be of higher value than the amount provided by the appraisal. Giving the borrower access to the appraisal report provides documentation for the borrower - especially if their loan was denied or circumstances changed due to a lower value than expected.
Under the ECOA Valuation Rule, the applicant can waive their right to promptly receive a copy of the written appraisal. The timing requirement for these copies may be waived by the consumer if they wish to receive any copy at or before closing, or account opening. The creditor must receive this waiver from the consumer at least 3 business days prior to closing or account opening. If the consumer does provide a waiver and the loan does not close, or the account is not opened, the creditor must provide these copies no later than 30 days after it is determined closing will not occur or the account will not be opened.
ECOA And The Application Process: Types Of Acceptable Income Considered For A Loan Review
Mortgage lenders will consider a vast array of income to support a loan application. The most important factor for all these sources is documentation and proof. Here are some of the most common forms of income used for qualification: • Salary or hourly income • Sole proprietorship income • Partnership income • S corporation income • Corporation income • Military income • Investment income • Social Security income • Non-taxable income • Rental or property income • Unemployment income
ECOA And The Application Process: Information Required On A Loan Application
If an applicant applies for credit and does not qualify, the creditor may allow a co-signer on the credit application. It is not necessary for the co-signer to be the applicant’s spouse, but the co-signer must meet the qualification requirements for the loan to be approved.
In addition to evaluating an applicant’s creditworthiness, the MLO is obligated under the rules of ECOA to collect specific government monitoring data. MLOs are required to ask for and record information about the applicant’s ethnicity, race and sex. This information in the form of a voluntary questionnaire for the borrower is in Section 8 of the URLA. If the borrower chooses not to answer the questions (the law and instructions on the URLA specifically state they are not required to do so), the MLO is required to make determination through visual observation or surname.
