QUESTION
We originate mortgages in 35 states, and all loan originations are retail. I am the company’s Chief Risk Officer. For years, we took the position that ECOA only applies to people who are applying for loans. We checked around and found that many banks had the same policy. Then, in 2020, we learned about a lawsuit against Bank of America, which changed our policy.
Apparently, Bank of America argued that it could disregard ECOA when it comes to existing customers. The dispute was over them not having to issue an adverse action notice. This did not go over well with the CFPB, which contended that ignoring the ECOA for existing customers would undermine anti-discrimination protections.
I’ve been told that the CFPB is now doing examination and enforcement audits to see if companies provide ECOA rules to applicants and existing customers.
Can you provide some insight into Regulation B’s protection of existing customers?
ANSWER
The case you referenced concerns the CFPB’s involvement in 2021.[i] Bank of America contended that it did not have to send an adverse action notice to an existing customer. The CFPB filed an amicus curiae (legalese for a brief filed as “friend of the court”), arguing that Bank of America’s position was contradicted by the language and history of the law.
According to the CFPB, the Equal Credit Opportunity Act (ECOA) protections against credit discrimination do not disappear when credit is extended; instead, ECOA shields existing borrowers from discrimination in all aspects of a credit arrangement.
You mentioned in your inquiry that my firm conducted an ECOA Tune-up® for you in 2020, and you now plan to do another one this year. We consider ECOA to be one of the primary regulations in mortgage banking. If others want information about the ECOA Tune-up®, please contact us HERE.
Briefly put, the CFPB contended that ECOA and its implementing rule, Regulation B, include those currently seeking credit and those who sought and have now received credit. The Bureau determined that this interpretation is the best reading of the statute itself. Any doubt whether the term “applicant” includes current borrowers is put to rest by Regulation B, which has expressly defined the term to include current borrowers for decades.
ECOA has been law since 1974. So, it is odd to have a big controversy over something like issuing an adverse action notice to existing customers. You would think that in ECOA’s nearly 50-year history, a matter such as issuing an adverse action notice would have been thoroughly vetted!
The first thing we need to do is define what an “applicant” is. Is an applicant a person who applies for an extension of credit? That would be logical, given Webster’s definition: “a person who applied for something (as a job).” I believe Clarence Darrow once said, ‘the trouble with the law is lawyers.’ If you want to be logical about definitions, be advised, lawspeak and common parlance do not always mesh well.
The ECOA is
abundantly clear about the definition of an applicant, to wit,
“… any person who applies to a creditor
directly for an extension, renewal, or continuation of credit, or applies to a
creditor indirectly by use of an existing credit plan for an amount
exceeding a previously established credit limit.”[ii]
[Emphasized]
Furthermore, adverse
action is codified in ECOA’s prohibition on discrimination as it applies
“… to all credit transactions including
the approval, denial, renewal, continuation, or revocation of any
open-end consumer credit account.” [Emphasized]
But the Federal
Reserve Board (FRB), in promulgating Regulation B, left no uncertainty about
whether ECOA should be applied to existing customers. It did so by defining
“applicant” to expressly include not only
“… any person who applies to a creditor
directly for an extension, renewal or continuation of credit” but also, “[w]ith
respect to any creditor[,] . . . any person to whom credit is or has been
extended by that creditor.”[iii]
[Emphasized]
The FRB then
locked in any attempt to skirt this provision by noting that ECOA’s express
terms and its legislative history
“demonstrate that Congress intended to
reach discrimination . . . ‘in any aspect of a credit transaction.’”[iv]
[Emphasized]
It could be
asserted that there’s a difference between a credit applicant and a debtor. That’s
fair as far as it goes. But, the FRB had the last say because it revised Regulation
B’s definition of “applicant” to include both those who request credit and
debtors,[v]
stating that an “applicant” includes
“any person who requests or [who] has received
an extension of credit from a creditor.”[vi]
[Emphasized]
You are correct that the CFPB is conducting examinations involving Regulation B compliance, but this is not something new, and it is not happening just now. The CFPB has been examining ECOA compliance for years. Perhaps you are more aware of the Bureau’s ECOA examination activities because it recently issued an advisory opinion (“Advisory”) on ECOA compliance concerning revocations or unfavorable changes to terms of existing credit arrangements.[vii]
With this Advisory, the CFPB affirms the established requirements to issue adverse action notices to an existing borrower. The Bureau clarifies that Regulation B protection is afforded to borrowers after they have applied for and received credit.
Lenders may not discriminate against borrowers with existing credit. For instance, the ECOA prohibits lenders from lowering the credit limit of certain borrowers’ accounts or subjecting certain borrowers to more aggressive collections practices on a prohibited basis, such as race.
ECOA’s private right of action points to supporting alleged discrimination from persons who have already received credit. Thus, an aggrieved “applicant” can bring suit against creditors who fail to comply with the ECOA or Regulation B. In effect, the history of the ECOA’s Regulation B and its judicial interpretation of an “applicant” cannot be understood to refer only to those with pending credit applications. If it were otherwise, a person whose application was denied on a prohibited basis would have no recourse under ECOA’s private right of action, which Congress intended would be the Act’s “chief enforcement tool.”[viii] Instead, the term “applicant” is not limited to those currently applying for credit.
If you have been holding off from doing an ECOA Tune-up®, I encourage you to consider it now, especially since the CFPB’s Advisory regarding ECOA compliance demonstrates a heightened interest in examination and enforcement. If you want information about an ECOA Tune-up®, please contact us HERE.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] Fralish
v Bank of America, N.A., US District Court, 21-2846, 7th Circuit,
(9.29.21); Fralish v Bank of America, N.A., US Court of Appeals, 7th
Circuit (1.28.22)
[ii] Pub.
L. 93-495, sec. 503, 88 Stat. at 1522 (codified at 15 U.S.C. 1691a(b))
[iii] 12
CFR 202.3(c) (1976); see also 40 FR at 49306
[iv] 40
FR at 49298 (quoting 15 U.S.C. 1691(a))
[v] 41
FR 29870, 29871 (July 20, 1976) (proposed rule)
[vi] 12
CFR 202.2(e) (1978) (emphasis added); see also 42 FR 1242, 1252 (Jan. 6, 1977)
(final rule)
[vii] Equal
Credit Opportunity (Regulation B); Revocations or Unfavorable Changes to the
Terms of Existing Credit Arrangements, Advisory Opinion, 12 CFR Part 1002,
Consumer Financial Protection Bureau, May 9, 2022
[viii]
S. Rep. 94-589, at 13
