Credit Union Exam Solutions Presents With Flying Colors

Having different risk based pricing
standards for married and unmarried

COA applicants based solely on
their marital status violates ECOA

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Hey everyone, this is Mark TriCal with
another episode of With Flying Colors.

I'm here again with Joe Goldberg.

Joe, how are you doing this afternoon?

Going well Mark.

Hope you are too.

Doing well, doing well.

Just got my HVAC replaced here
and I've got a chill in the air.

So life is good.

All right.

So, Joe, you were, have been
an attorney for 40 years.

You also taught consumer law and at
the, at the, Your last transition to

consulting and doing some other things
that I know you do, you were at NCUA

for eight years where you were in charge
of the division that was responsible

for HMDA, fair lending, and, you know,
consumer compliance in all areas.

And that's where I met you.

And that's how we got connected
here on the other side, now

that we're both outside of NCUA.

And I'm looking forward
today to chat with you.

About the ECOA and, and Reg B
and the significance and purpose

of fair lending and ECOA.

So with that, Joe, I'm going to turn
the, the, the microphone over to you.

Thank you very much, Mark.

Appreciate it.

I appreciate, appreciate the
opportunity to talk about this

because being a somewhat of a
consumer compliance nerd, you know,

this is this is enjoyable for me.

I'm going to talk about the
equal credit opportunity act.

And it's regulation, Reg B, COA is how
it's usually abbreviated the acronym.

I'm going to go a little bit into the
background, why it's important, and then

get into some of the meat of the, of
the, the law itself and the regulation.

Uh, before I start
though, I do want to make.

Big one statement is, and
that is, I know that N.

C.

U.

A.

has increased its focus on fair
lending in the last several years.

They even started when I was there.

I left there at the end of 2021,
but that's that's still true.

And, in fact, the agency is expanding
its fair lending examination program.

So, having a discussion about
eco is probably important for

credit unions at this time.

Well, and Joe, let's pause there
here, right on the front end.

So you and I were chatting offline
and they added a new supervisor that's

responsible essentially for just that.

If I, if I remember, right, right.

There's now a division for fair
lending supervision, a whole

separate division within the office
of consumer financial protection.

So that, that tells you right
there that the agency is serious

about expanding the program.

Yes.

And I would even say, and I've
said this several other podcasts

of different topics that.

Chairman Todd Harper is very passionate
about consumer compliance, which

includes this, and he has been operating
as chairman with two Republican board

members, and board member Rodney
Hood's term is up in August, and in all

likelihood, there will, I would envision
a relatively quick turnaround there so

that this is the only agency that's, that
has more, more Has a controlling interest

by the party that's not in the president.

So, you know, Rodney Hood's done a
great job as a board member, but there

are things I think that in this arena
that chairman Todd Harper may want to

do, like expanding it again with this
next budget that comes up for 2024.

All right.

With that, that's my,
that's my two cents on it.

Again, the microphone is yours, Joe.

All right.

Thank you.

So let's first look at the
significance and the purpose of the

Fair Lending and the Equal Credit
Opportunity Act specifically.

So what ECOA does is it requires
creditors to make decisions related

to providing credit and the terms of
credit based, they would base them

solely on credit related factors.

That's in a nutshell,
that's the purpose of ECOA.

Because, as we'll talk about, there are
other factors that are discriminatory

in nature and therefore illegal.

So, Congress passed the Equal Credit
Opportunity Act in 1974, and as Congress

sometimes does, not always, But they did
with respect to ECOA, they put right in

the law findings and purpose, and I'm,
I'm going to read it to you so you see

exactly what it is that Congress intended
when they did this, the Congress finds

that there is a need to ensure that the
various financial institutions and other

firms engaged in the extension of credit
exercise their responsibility to make

credit available with fairness, Bye bye.

Bye.

Impartiality, excuse me, impartiality
and without discrimination on the

basis of sex or marital status.

Economic stabilization would be enhanced
and competition among the various

financial institutions and other firms
engaged in the extension of credit

would be strengthened by an absence
of discrimination on the basis of sex

or marital status, as well as by the
informed use of credit, which Congress

has heretofore sought to promote.

It is the purpose of this act to
require that financial institutions.

And other firms engaged in the extension
of credit, make that credit equally

available to all credit worthy customers
without regard to sex or marital status.

Well, that that's that's it.

That's the purpose of of this and what.

Congress intended when
they wrote this law.

Now you'll notice it repeatedly
refers to sex or marital status.

Two years after this was passed
in 1976, Congress added the

other seven prohibited bases.

That's the term used for what, if
that particular term or quality

was used in the, Decision process
would constitute discrimination.

So, there are 9 of them, even
though the original purpose and

the original act is only with
respect to sex or marital status.

So, what it does is, if you have the
written purpose that I read in front

of you, you would see it does 2 things.

Prohibited discrimination
in credit transactions.

And then require disclosure of why
credit was denied or changed that has

to do with the informed use of credit.

That was in that purpose.

You may be familiar with the term
adverse action notices and that's

what I'm referring to about the
disclosure of the reasons for credit

being denied or terms being changed.

You know, there's now
good to point that out.

Yeah, there's, there's
now a 3rd primary purpose.

Congress amended ECOA in the Dodd Frank
Act, and because of a regulation recently

released by the CFPB, creditors who make
credit available to small businesses.

And there's a threshold amount
to come under this provision, but

those who do must collect and report
data with regards to those small

business transactions to the CFPB.

I'm not really going to talk about
that in this podcast because it's,

it would take up too much time and we
have, we'll do that in another podcast.

You got it.

You got it.

All right, now, then there are some other
smaller provisions of lesser importance.

I would characterize that as, but
I'll talk about those very briefly

toward the end of the presentation.

All right.

Now, one thing before I
dive into the details.

I just want to review.

The difference between a law and
a regulation, because we do talk

about a, which is a, an act.

It's a law passed by Congress and
also the regulation laws that laws are

enacted by Congress regulations are
promulgated by somebody that's appointed

by Congress to promulgate the regulations.

Usually it's an agency.

Sometimes it refers to an individual, such
as the secretary of, but the purpose is.

To allow the entity that has expertise
in a certain matter to come up

with the fine details and the rules
and regulations that Congress.

Requires in a wall.

That's a, that's a, that's a great point.

Let's let me just kind of pause there.

So putting that in, like, in
terms, the federal credit union

act is a fact approved by Congress.

And then that would require in some
instances, or other actions would require

promulgate regulations as you describe.

Which allows the kind of the mission and
the principles, I guess, to be put in

place in the law, and then it gives the
regulators some authority to make it a

little bit more nimble, so they don't have
to run back to Congress if a change on

how it might be implemented or whatever
was delegated to the, uh, To the agency

to regulate any thoughts on what I just
said, no, that that's exactly right.

The, to some extent, the law is often
the outline and then the regulation is

the details that fills in the outline the
regulation will do such things as define.

Parts of the law, it may
explain what certain things in

the law are supposed to mean.

It will create the rules.

And by regulation, but those are
the rules by which those who are

covered under that law must must act.

And, yeah, it's, it's the, the
whole purpose is to recognize that

there are those with expertise, more
expertise in Congress in a specific

area, and they are more capable of
providing the details than Congress.

This is the way the government
is intended to work anyway.

Right, and there are
restrictions and agency cannot

go beyond what a law provides.

It can, as I said, it can
define certain things.

It can create the rules, but it can't add.

To the law, unless Congress
specifically says this agency shall say.

Who this affects, and it does that
in some respects with the consumer

protection laws, it does give now the
CFPB the authority to determine whether

there should be any exceptions to
those who are covered under the law.

Sometimes that's in the law, but
a lot of times that's left up

to the agency and you'll, you'll
find that there are exceptions.

We know that with a number of, a
number of consumer protection laws.

Anyway, so generally speaking, we'll
talk about the law and talk about a COA.

I'm not really going to differentiate
between the origin, whether it's in

the law or the regulation, because
I think it's more important that you

hear what it is you have to comply
with, regardless of where it came from.

And you can always go look them up
if you're, you're that interested.

You got it.

All right.

So now first, first thing
is the coverage of ECOA.

What does it cover?

Well, it covers all forms
of credit, not just mortgage

loans, but all sorts of loans.

And it covers consumer credit,
but also small business lending.

And as I said, there is a new provision
that we aren't going to get into the

details, but essentially Congress
decided that just because somebody is

seeking credit as a business, that they
should not be victims of discrimination.

So there are provisions that
apply to business lending as well.

All right, now the 1st general purpose
or primary purpose of ECOA, as I

said, is to prohibit discrimination
in any aspect of a credit transaction.

And that's in quotes, any
aspect of a credit transaction.

That term is defined in Regulation
B, and applicant's dealings with a

creditor regarding the application.

And that's pretty much from beginning.

Of the application process, even before
that, because we do, there is marketing

involved that can be discriminatory.

And then there are also provisions that
apply to when the credit has already been.

Provided to a borrower and
what happens down the line.

Uh, and 1, I want to point that out
because a couple of years ago, there was

a court case in which the court decided.

That apparently, without reading the
regulation that, because so much of a

refers to applications and applicants
that it only apply to the application

process and nothing after that
eventually higher courts corrected that

because there are provisions defining.

The different terms and application
does actually for purposes refer

also to what happens after the
application has been approved.

So, Joe, yeah, I just learned something.

So on the advertising side, every
aspect, it could be advertising

and that I guess that would be.

Like, a redlining situation where
someone chooses not to market

in a particular area if they're.

If there are reasons for that were flawed
because they were trying to discriminate

that would apply to this, right?

I right.

Okay.

Great.

Yeah.

I hadn't I the advertising piece of it.

It just never clicked with me.

But the way you described it
there, I was very helpful.

Yeah, there are exceptions for some
types of credit, but generally speaking,

especially for consumers, it's pretty
much all credit 1 thing that I will

talk about at some point is what's
called a special purpose credit program.

And there are, there's some other.

Provisions that allow disparate treatment,
if you will, if the party involved

is in an economically disadvantaged
class, and that treatment is beneficial

to that person and others that are in
the economically disadvantaged class.

Well, I'll talk about that along the
way, because it actually applies to a

couple of different provisions here.

So that's, that's essentially
what is covered by ACOA.

And the term that's used in the act
of the regulation is prohibited basis

or prohibited bases is the plural.

The act itself ECOA contains all
the prohibited bases that are

covered by the provisions of ECOA.

They are race, color, religion, national
origin, sex, marital status, age.

Whether an applicant's income derives
from any public assistance program, and

whether an applicant has in good faith
exercised any right under this chapter.

Now, this chapter is a group of
laws that are considered to be

the consumer protection laws,
federal consumer protection laws.

And I'm going to talk about each one of
these specifically, so you'll get some

idea of what is meant by these terms.

And

1 of the 1 of the items that you also have
to realize is that the prohibitions can

extend beyond just who the applicant is.

For example, a creditor cannot
discriminate against an applicant

because that applicant does business
with somebody of a particular

race, religion, or national origin.

So it's, it's, it's broader
than it sounds, but it's done

to prevent discrimination.

I mean, it still satisfies that purpose.

Let's take a look at
what these terms mean.

Race and color mean exactly
what you think they mean.

I don't think there's any need to go
into what, what the definitions are.

They're self explanatory.

A national origin, uh, probably also
falls into that category, but under

the official interpretation of Reg
B, a creditor can consider a person's

citizenship in some circumstances.

They would still have to be
related to the credit evaluation

process, but here's an example.

If the applicant would be required
to provide security for the loan,

Let's say it's a motor vehicle loan.

The car is going to be security.

The creditor consider can consider whether
that security would be available to

the creditor in the event of a default.

So somebody from Europe is in the
United States legitimately here,

buys a car, gets a loan for it, but
has the capacity to take that car.

Across the Atlantic and use it there.

The creditor who's considering the
application can make the determination

that the risk of not having the security
there could be a reason to deny the loan.

That's a great example.

Yeah, no, that, that makes perfect sense.

Yeah, I mean, and it does make sense.

I mean, it's not, you know, the
creditor should not be put in a position

where it's really just, you know, a
risky loan that shouldn't be made.

Right.

All right.

The term sex refers to gender, at least
originally referred to gender, but

also prohibits discrimination based on
sexual preference and gender identity.

So it's kind of a broader term than
it first appears and marital status.

Was originally included here.

In fact, the, the, the original ECOA,
I think, grew out of the practice of

mostly wives, not being able to get
credit on their own because they needed

either the creditor would require a
husband to be a co signer or guarantor

or be involved in the credit transaction
because, you know, wives weren't

considered to be a good credit risk.

Right.

And obviously, even even back in
1974, it was pretty obvious that

was just purely discriminatory.

And there was real the real
basis for that kind of analysis.

So, you know, now a spouse who applies
for credit cannot be denied credit.

If he or she qualifies on his or her
own without the need to have a spouse.

Now, couple of things.

Number one, if that person does not
qualify to get credit on their own, and

a guarantor or co-signer is required,

creditor cannot require the guarantor
or co borrower to be the spouse

'cause that would just be a way
to get around this prohibition.

Secondly, there is an exception to
this, similar to the citizenship

issue that I mentioned.

And that is, there are some states where
their property laws would make it so that

if one individual applies for credit.

That could involve security that could
be impaired without the other spouse

being part of the transaction, right?

Generally, it's a domestic
relations type of matter.

Usually what is what happens, but
the creditor can take into account

whether the state law gives that
applicant spouse an interest.

In the property being offered
as collateral again, it's

the same same analysis.

Would that create an undue risk?

That would make the transaction 1
that the creditor would not approve.

Sure.

That makes sense to, you know, right?

Right.

So, you know, sometimes
the laws do make sense.

Yeah, that's good.

It's good.

It's good.

When we can, we can, when we
can conclude that that's true.

Yeah.

All right.

Also, I do want to mention this
credit unions and all other

creditors and not evaluate

unmarried co applicants differently
than married co applicants.

And I want to refer to a letter to credit
unions that NCUA sent in February of 2022.

The letter is 22 CU 04.

And in that letter, the agency pointed

out that having different risk based
pricing standards for married and

unmarried COA applicants based solely
on their marital status violates ECOA.

And the letter mentions that a common
violation that NCOA examiners were

seeing, and I believe they are still
seeing, is when married co applicants

apply for credit, the credit union will
use the higher of the two credit scores.

But when the co applicants are
unmarried, the credit union will

use the score of what it considers
to be the primary applicant.

Sometimes we ask how they determine
that and we would get the answer.

It's the one who signs the contract
first, but signs the application first,

you know, but the point is that it's
marital status is what's dictating

how the, the creditor is evaluating
the applicants and that's improper.

You're getting treated better
if you're married than if not.

And the reality is the risk is
the same and it's a violation

to discriminate against the.

In this example, you gave choosing the
lower credit score because because they

weren't married is a clear violation.

And unfortunately, for a lot of
credit unions, that's right in there.

It was right in their
policies and procedures.

And, in fact, I'm going to talk about
this a little bit at some point down the

line in this presentation that requires.

The regulatory agency to refer the
matter to the Department of justice to

see if it wants to take over the case.

So, you know, words of the wise,
if if there's anything like that.

In your policies or procedures, you
need to evaluate them to make sure

that you're not in violation of the.

And I'm just kind of dovetails into the
next one, which is age discrimination

based on age is a violation.

But there's a few caveats to that.

Number 1, if the applicant
is below the age.

That.

Of majority where the person
can be bound to a contract.

Usually, it's under the age of 18, 18
is a magic age down almost every state.

I believe if the person is under that
age of majority age can be considered

a factor because again, you get into
security because if that person can person

can essentially renounce the contract,
it becomes a problem for the creditor.

Other than that, credit related factors
are the only way to judge whether that

a young person is entitled to credit.

And I'll talk about that in a second.

Well, let me just talk about it now.

There are standards that a creditor
consider, that can, the creditor can

consider, such as length of employment.

Now, length of employment would have
to be a reasonable amount of time.

It could not just be a proxy for age.

Thank you.

Uh, it can't be such a long period of
time that somebody, let's say 21, you

know, could never qualify because they
hadn't been working since they were

age 10 or something along those lines.

That's an extreme example, but that's
that's the idea is that it has to be

a legitimate consideration and not
1 just because the creditor doesn't

want to loan to really young people.

Joe, when you're, when you're,
when you're talking through that,

I'm thinking about the Columbia.

Record thing that you could join back in
the day where you'd get, you'd get 12,

12 or 13 tapes or record albums for a
penny and you'd tape your penny on it.

And then after that, you'd have
to, you'd have to buy six or

eight, six or eight albums that,
you know, at an inflated price.

And I remember at my
school there, there was.

An understanding that if you
were under 18, you could do that.

You could get those 15
record albums for a penny.

And then when they, when they told
you that they, that you needed

to live up to the terms of the
contract, you weren't 18 yet.

So you couldn't, they couldn't demand
that you then buy those next overpriced.

Absolutely.

So, yeah, I do.

I'm older than you.

I remember that.

So, all right.

But a couple of things.

First, it is permissible for a
creditor to use age to provide a

benefit to an elderly applicant.

That's a term that's used.

I'm not using any kind
of disparaging term.

It says right in there, elderly
applicant, and maybe it is disparaging

because elderly for a code means
62 years or older, which I'm not.

I'm not sure that qualifies as elderly
these days, but that's what exactly.

Yeah, so if it's a benefit to somebody
in that age category, 60 to 62 or

older, then age can be considered.

And now there's another provision
that allows a creditor to use a

system that does consider age, but
under very narrow circumstances.

It can't be a negative value or factor
for an elderly applicant using that same

definition and the creditor has to use.

I'm using terms now directly from
the regulation and empirically

derived credit system, which
considers age that is demonstrably

and statistically sound in accordance
with the rest of regulation being.

I don't want to get into too
much discussion about this, but I

can tell you in my time at NCUA.

Okay.

I never saw such a system.

There were no, there were,
there were credit unions who

had standards where there was a
minimum age for certain things.

They did not have a way to prove that
they, the system was statistically

or demonstrably sound, demonstrably
easy for me to say sound.

So I would, I would exercise
caution if you're thinking

about doing something like that.

And finally.

Age can be considered if there's an
inquiry for the purpose of determining

the amount and probable continuance of
income levels, credit history or other

pertinent element of credit worthiness.

And there's some, some further fleshing
out of that in the regulations.

And that same 2022 letter to credit
unions that I mentioned with respect

to marital status does talk about
the age discrimination issue.

And what it specifically
refers to is this.

These are again, things that examiners
were finding on a regular basis, and I

think they still are and that is where
there were automated underwriting systems.

That were set to kick out from
the automated underwriting system.

Those who are under a specified age.

I remember 1 credit union has 3 or 4
different ages, depending on the product.

They, they were sent to manual
underwriting and what we heard almost

in every credit union where we found
these was, well, we send them the

manual underwriting, but we weren't
denying them for for those reasons.

The mere fact that someone was being
evaluated by a different system because

of a prohibited basis was the violation.

And again, the N.

C.

U.

A.

was required to refer several credit
unions to the Department of justice.

Because of those violations, so I would
caution you haven't done this recently.

Take a look at your policies and
procedures and see if there's

anything like that in them,
because it's a potential problem.

Very good.

You have a referral to
the Department of Justice.

It's not something that NCOA does lightly
and it's not something if you're out

there in credit union land, you want to
have on your resume if you were exactly

now, the the referrals themselves.

Are not a matter of public record.

They do become public if the Department
of Justice decides to keep that referral.

And handle a case, they will, they
will make it public, but until.

Unless that is done, it
doesn't, doesn't do that.

The, the agency does.

Provide the number of referrals per year
to other agencies as required by law, but

the names are not are not made public.

However, you run the risk of D.

O.

J.

keeping 1 of those and.

This just as Mark said,
it's not something you want.

So, all right now, the last 2
prohibited bases 1 is income derived

from a public assistance program.

Somewhat somewhat obvious if somebody
has income from, let's say, disability.

You have a permanent disability or
something along those lines, social

security income, just the mere fact that
the income is not from an occupation,

but it's from public assistance of
some sort is not enough to deny a

person if they're otherwise qualified.

However, same as with age.

There can be an inquiry, inquiry
made to determine the amount and

probable continuance of income levels.

If somebody is receiving benefits
that have an end date, that can be

considered when deciding whether
the person has the requisite

qualifications credit for a credit,
they're going to be able to continue

to pay for the duration of whatever
the credit is it's being considered.

But that's the only reason.

And then finally, the prohibited basis of
denying somebody credit or the terms of

the credit, not being the same as other
people, based on the fact that somebody

exercised rights under certain laws.

As I mentioned, it's the Consumer Credit
Protection Act is the name of the section.

Of the federal laws that contain a
co and a number of other laws, such

as a fair credit reporting act, a
fair debt collection practices act

or electronic fund transfer act
and also the truth and lending act.

So, let's suppose somebody, um, ends
up suing the credit union because

there is a truth and lending violation.

And they lost some money from it somehow
or other, uh, and then a couple of

years later applies for credit with
the credit union, the credit union.

Cannot deny the application or change
the terms that are being applied for

solely because that person sued the
credit union under one of these laws.

Got it.

Yeah, you can't you can't discriminate
against me for pursuing my rights.

Exactly.

Okay.

Well, you know, Joe,
there's been a lot to.

We've talked about a lot already.

I know we got more that we want to
talk about, including a second primary

function and, you know, special, I
think some, some other provisions like

the special purpose credit program.

And then I think we're going to do a
little bit more of a discussion on the

referral program to the department of
judge department of justice, but this is

a good spot to kind of break this one.

If not in two, break it in
two thirds on the front end

and one third on the back end.

So John, I want to thank you.

For what you've already said, and
let's start back up with a, with a

second take on this topic here shortly.

Thanks, Jim.

Thank you, Mark.

You got it.

And listeners, I want to thank
you for listening to this

episode of With Flying Colors.

There'll be the next episode in
queue will be part two of this topic.

I want to thank you for listening
and this is Mark Treichel

signing off with Flying Colors.

for joining us on this
episode of With Flying Colors.

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