Credit Union Exam Solutions Presents With Flying Colors

While a specific number of reasons
is not mandated, more than four

reasons is probably not helpful.

And the reason is because if somebody
has a significant number of problems,

it's probably going to be hard for them
to deal with all of them, but it would

be much more beneficial for those people
to know that the 3 or 4 most significant

problems with your credit are ABC and D

Hey everyone, this is Mark with a special
Archive episode of With Flying Colors.

I hope you enjoy.

Do you want to maximize
your success with NCUA?

Join Mark Treichel as he shares with
you the Insider's View on passing

your exam with Flying Colors.

The With Flying Colors podcast
is sponsored by Credit Union

Exam Solutions by Mark Treichel.

If you would like to work directly
with the Credit Union Exam Solutions

team and receive Support to
optimize your results with NCUA.

So you save time and money.

Visit us at marctreichel.

com to find out more.

Hey everyone.

This is Marc Treichel with another
episode of With Flying Colors.

I'm back again with Joe Goldberg.

Joe, you ready for part two?

Absolutely, Mark.

All right.

Well, Joe, I'll keep your intro,
your bio a little bit shorter.

Joe's been an attorney for 40 years.

He's now consulting and
doing a few other things.

He spent eight years at NCUA.

And he's a consumer
compliance guru of sorts.

And we are going to jump back into
ECOA, Reg B and a few remaining topics

on this that we didn't cover in part
one, Joe, the microphone is yours.

All right.

Thank you very much, Mark.

Then in the first part of this,
we talked about the background

of ECOA and then we went through.

What I characterize is one of the
two primary purposes of the law,

which is to prevent discrimination.

And now we're going to look at the second
primary purpose, which is to encourage

the informed use of credit, which is a
stated purpose that Congress put right

in the Equal Credit Opportunity Act.

And the way that it did
that is that it required.

A creditor to provide a notice to
an applicant who is either denied

credit or received credit on terms
that were not as favorable as the

terms that the person applied for.

Many of you may be familiar with
the term adverse action notice, and

that's what this, this notice is.

It's a notice that adverse action
was taken on the application.

So, let's take a look at what,
what is done either through the

act itself or through Regulation B.

So, the purpose of this is
to inform an applicant of the

reasons for the adverse action.

Why was the credit denied?

Why was it revoked?

Why was it provided?

Obviously, the revocation would
be existing credit, or was

existing credit adversely changed?

Or was the credit applied for originally
approved, but approved with less

favorable terms than those requested.

So it's the why, here's what, here's why
we didn't want you to be our customer.

The adverse action notices must provide
specific reasons in some level of detail.

For example, you cannot just say applicant
does not meet our lending standards.

It's just not sufficient.

First of all, a borrower is not going
to know what your lending standards are.

And which one is it that they didn't meet?

It's just simply isn't informing
the applicant of the reasons

for the adverse action.

So, uh, so, uh, Joe, if they have a
debt to income ratio of X percent.

And you were at X plus 5%.

You could say that your obligations
and debt ratio is that would be,

would that be something that would be
specific enough to meet this right?

That would be specific.

There's not a need to put the exact
numbers that you're looking that

the credit union looks for what
the persons were just the fact

that the debt to income ratio.

However you want to term it was
too great to, to, for the credit

union to provide the credit.

Got it.

All right now, this is all the
way the regulation approaches

the adverse action notice.

It does say that the notice
should contain the principle

reasons for the adverse action.

And the reason that it discusses
this is there's a problem with

not providing enough information,
but there's also a problem with

providing too much information.

What the official interpretation of
regular regulation be states is that.

While a specific number of reasons
is not mandated, more than four

reasons is probably not helpful.

And the reason is because if somebody has
a significant number of problems, it's

probably going to be hard for them to deal
with all of them, but it would be much

more beneficial for those people to know
that the 3 or 4 most significant problems

with your credit are ABC and D that
then gives that borrower or applicant.

The ability to start to address the
credit deficiencies, and it makes sense

because I didn't yeah that I learned
that today that I was today years old,

understanding that but that makes sense
that you don't want to pile on you

don't want to say here's the 47 reasons.

What were the main reasons, and then
they can look towards resolving those.

Exactly.

If, you know, if the main reason is your
income is too low, or if your debts are

too high, those whether whether the person
can actually address those is debatable.

But the fact is, for for most people,
that's going to be the type of

problem that if it was alleviated.

We get them into consideration for
some type of credit, maybe not,

maybe under different terms, but so,
yeah, you want to be able to, as an

applicant, know what are the few things
I can do to try and better my credit.

And again, for some people, it may be
beyond repair, unfortunately, but for

the great number of people, it's not.

And if they know what they can,
they have to address, they can take

some steps to, to address that.

So now there's, there's some
wrinkles to this, for example, if

the credit union says, we can't
give you this loan on these terms.

However, we can give you
this car loan at X plus 2%.

Interest rate instead
of what you asked for.

If the person accepts the counter
offer, then, then they're okay.

There, there is no need for adverse action
because the credit has been consummated.

Also, if there's an automatic denial
based on one factor in an AUS, automated,

automated underwriting system, you
don't have to, it, it also permits the

creditor for, to provide only one notice
where the Fair Credit Reporting Act.

Also requires an adverse action notice.

Again, some of you may be familiar
with the fact that if a credit

report or a consumer consumer report
as a proper terminology is used.

In considering whether
to extend the credit.

The fair credit reporting act also has
an adverse action notice requirement

so that if the credit is denied, or the
terms are less favorable that applied for.

And a credit report was
used in that determination.

There has to be an adverse
action notice under the F.

C.

R.

A.

Interesting.

The, the ECOA Reg B, the CFPB said a
few years ago, and then I say a few,

it may have been six, seven, eight
years ago, that, The use of a single

notice for both will satisfy ECOA.

So, and there, I believe that there's
even a form, a sample form in the

official interpretation of the regulation.

Am I, am I right?

Excuse me, that, that the applicant can,
has a way to say, hey, if, if, if you're

going to give me an adverse action.

I'd rather get it in hard
copy or electronically.

Are, am I right about that?

And then are, is the
institution required to do both?

The institution can actually give an
oral notice, but you won't find that

very often because the, what you have
to say orally is pretty much what you

would have to put in a written notice
and it's a little bit complicated to have

somebody sit down there and, you know,
sit and read this orally to a consumer.

So.

The answer is yes.

And in fact, the person doesn't have
to provide the notice, but has to

say that the notice is available.

Excuse me.

The creditor doesn't have to creditor
can say the notice is available.

And then the person can ask for it.

But it really doesn't make sense for a
creditor to try and give the reasons.

Orally, you run a real risk
for compliance purposes.

Consistency would be hard to maintain
and then it also could get, you know,

into a debate and you could end up
having conversations you wouldn't

even want to contemplate having.

Exactly.

Exactly.

And then the last thing I do want to say
is that there's also a requirement for

something similar for business applicants.

The standards are different.

I don't want to go into
them, but they're, they're.

Pretty easy to read in the regulation.

I don't think we need to
go into him at this time.

Got it.

All right.

Now, you know, we talked about the
2 significant provisions, but there

are some other provisions of a coa
that everybody should know about.

And 1, I did mention a little bit
earlier, and that is a special

purpose credit program, and this is
a carve out that allows creditors.

To meet the credit needs of specified
classes of persons, and these are

for programs for those who are
economically or socially disadvantaged.

Either consumers or commercial
enterprises, there are rules that

govern these, there actually is sort
of one set of rules for for profit,

financial institutions, and then another
set for nonprofits, they, they allow

this type of credit to be extended.

And there has to be,
it's one of two things.

It's a credit assistance program
that's expressly authorized by federal

or state law for the benefit of an
economically disadvantaged class of

persons, or a credit assistance program
offered by a not for profit organization

for the benefit of its members.

Or an economically disadvantaged class
of persons credit unions fall under

the not for profit organization prong.

So, you know, there is consideration
of the membership and the credit union

can target a portion of its membership
if it is specifically an economically

disadvantaged class of persons.

Again, if you're interested in looking
at this, I know that I believe in 2022,

NCUA sent a letter to credit unions
describing the availability of these

programs to credit unions and encouraging
some to look at the possibility of

implementing some of these programs if
it was appropriate for their membership.

Interesting.

Yeah, I'll have to take
a look at that letter.

I'm not familiar with
that if that's out there.

Thank you.

It went out, I believe it went out at the
same, may have been something other than a

letter, a formal letter to credit unions,
but I know that whatever was sent out was

done around the same time as banks put
out something similar, you know, banks.

Yeah, it probably was a
letter to credit unions.

That would be the natural way to do that.

Yeah.

All right.

So, we talked in the first part of
this presentation about the referring

of credit unions to the Department
of Justice for violations of ECOA.

There is a provision right in ECOA,
it's section 1691E, and then in

parentheses, it's subsection G,
that requires a financial regulator,

Federal financial regulator to
refer to the Department of justice.

Institutions under its supervision when
there is a reason to believe that the

institution has engaged in a pattern
or practice of illegal discrimination.

And I mentioned in this, the 1st, part of
this presentation that has done so for age

violations violations for discrimination
based on the prohibited basis of age.

And also on the prohibited basis
of marital status, at least.

During the time I was there, the
Department of Justice returned all

of the referrals, mostly because they
felt that the NCOA, as an agency, had

properly handled the matters internally,
and there was no need for the DOJ to

be involved and to file an action.

In 1996, DOJ issued guidance.

To the federal banking regulators, and
I use that term in its broad sense,

because included in the title of
it is identifying lender practices.

That may form the basis of a
pattern or practice for referrals

to the Department of justice.

It's publicly available.

It's still in, it's still in play,
DOJ considers it to be still an active

guidance if you will, NCUA uses it, it's
available to the, to the credit unions.

It might be on NCU's
website, NCUA's website.

I'm not positive.

I'll talk about that in a minute
where things are, but I know that

DOJ has it publicly available.

Got it.

It's actually fairly interesting reading
because it does give you some guidance on

how to avoid being caught up in a problem
with a COA that results in a referral.

All right, so, and I did note
that NCOA has done that is

now become a regular thing.

Unfortunately, there are a number
of credit unions who just can't

seem to get this either age
discrimination or marital status.

Issue fixed.

So some of the others, as you said,
as you said, the word is required.

If NCOA comes across the fact pattern that
fits, they have to refer it to the DOJ.

It's not, it's not a, there's
not an art to that determination.

If the facts are the facts are the facts.

And if there is a discrimination, it
must go to DOJ and, and then NCOA can

tell the credit union to fix it or the
credit union can respond and fix it.

And it's those kinds of things that
DOJ weighs once it's referred to them.

Right, and generally, I can tell you my
experience was we would have conversations

with credit union management and explain
the standards that are in that DOJ

publication, which includes such things as
restitution having been made the problem

already being corrected and, you know,
we would point out that abiding by those.

Provisions and that DOJ guidance would
go a long way to the DOJ, not keeping

referrals and it's, it's, it's just makes
sense that you'd want to take care of

your members anyway, if there was any
issue that, you know, that similar to

similar to showing remorse at sentencing.

To some extent, to some extent, if, if,
if it's, if it's sincere, yeah, I wasn't,

I, I was just trying to put it into, you
know, I'm not a lawyer, but I'm putting

it into the real world ramifications
and analogies that I can think of.

But anyway, all right.

And in, in, in defense of all the
credit unions we dealt with to

a credit union, each one said we
had no idea this is not right.

We shouldn't, we don't want
to do this to our members.

How do we make it right?

And it's easy.

I mean, you have something, we've
always done it this way, right?

It's been in there for
five years or 10 years.

And then when you, and so it goes in
and raises the question and you look

at it through a different lens, you can
go, Oh my gosh, I didn't realize that.

How do I fix it?

Oh, yeah, there were, there were
definitely credit unions where there was

nobody left in the credit union who knew
when that practice had been implemented.

So get that.

Yeah.

All right.

So some of the other requirements of a
COA that haven't yet been covered is that

it does require a creditor to provide a
written copy of an appraisal or offer.

The appraisal that was used in a credit
decision and at no cost for the copy to

the applicant, just it's a requirement.

There are also in this kind of dovetails
into what we just talked about with the D.

O.

J.

referrals to some extent.

There are incentives built into.

The for self testing and self correction,
it can eliminate a finding of a violation.

Uh, if a credit union on its own self
tests, that could be either internal

or the use of a, you know, a 3rd party
doing some type of external audit and as

a means of testing and self correction.

Um, and I know that there have been some
credit unions who self reported to when

I was there saying, hey, we found this.

We've corrected it.

What do we do?

And under a would not have been a problem
because as long as the standards were

met for self correction and self testing.

So that's again, that's an incentive.

To the.

Credit industry as a whole to do
things right and to get things right.

There is a brand new, um, section
of a co op that essentially, let's

see, the effective date is going to
be April, excuse me, August 29th of

2023, although the compliance date as
well after that, there is a separate.

Podcasts that goes into detail
on it, but it refers there.

Excuse me.

It requires.

Those who lend to small businesses to
collect data similar to hum the data

and beyond that for every application.

And report that data to the CFPB, um,
as long as you, the creditor meets

the threshold of threshold is at least
100 originations to small businesses

for each of the prior 2 years that
would require report collection

reporting in the 3rd year and detailed.

Joe, let me interrupt
there for one second.

The, that podcast is podcast number
111, which is, which is published

and was published on June 13th.

So, all right, if you that'll
this, the one we're recording

today will come after June 13th.

So if you're listening to it, and you want
to hear the podcast Joe is referring to on

the small business loan data collection,
it's number 111 published on June 13th.

Great.

Thank you for that, Mark.

Great.

Um, enforcement for federal credit unions.

The NCOA is the enforcing agency
for ACOA for federally insured

state credit unions and for non
federally insured state charters.

The Federal Trade Commission
is the enforcement agency.

Now, the Act also includes provisions
for private actions against

a creditor who violates ACOA.

The, the act allows for the recovery of
actual damages for punitive damages, up to

10, 000 for a case involving an individual
class actions are not prohibited.

And in fact, there is a provision under
the punitive damages section that governs

how much the punitive damages can be.

And just so you know, it's the lesser of.

500, 000 or 1 percent of
the net worth of the actor.

If there's a punitive damages in a
class action for class actions, if

there are actual damages, there's
not a limit to the actual damages.

And also there can be injunctive relief
and an award of attorney's fees and costs.

Joe, on, on class actions, um, you
know, just, this is just kind of a

something that jumped into my head
and not related to this particular

topic, but a class action lawsuit
for, um, you know, your, your cable

company overcharged you a dollar for.

Something over 10 years and you, you get a
notification that you had service by this

cable company and, you know, you can, you
can opt in as part of the class action.

And then 2 years later, you get a
check for 4 dollars and 76 cents.

And, but the law firm got
a big settlement, right?

Um.

Any thought, and I know that what,
what's being protected under these

laws here and the ability to have
these class action lawsuits make

sense because, because of the.

The if there's an intent to do something
very bad against people that that

kind of protects that from happening,
but can you think of examples?

And I know I'm kind of putting you on the
spot here, but, you know, the example of

where I got a check for 4 and 12 cents
to me seems to be almost an inappropriate

use of class action lawsuits.

Can you in your history of what
you've seen out there in this arena?

Can you think of some
class action lawsuits that?

That, um, that, that were, were
worthy and actually ended up

getting a reasonable settlement
for, for people there are attorneys.

Yeah, I can't, I can't come up with one
off hand, but I was involved in several

class actions in my private practice.

And what you're raising is an argument
that sort of has been there historically.

The, the, the issue is.

Is it okay to steal a million
dollars from one person or it's

or it's not okay, obviously, to
steal a million dollars, right?

One person, right?

What is the materiality?

It's okay to steal 10 million, you
know, dollars from 50 million people

because you, if you file a class action,
everybody only gets 50 cents, but,

you know, if you don't have the class
action process, then the, the business

that acts illegally gets to keep.

The profits from the legal activity,
I guess it's, it's like having

a referee or an umpire, right?

You gotta have someone there
to call balls and strikes.

Yeah, exactly.

Exactly.

And you know, people complain about
the attorney's fees, which may or, you

know, um, sometimes they're exorbitant,
sometimes they're not, but that, that

sort of also fits into the whole concept
of if there's no penalty for, you know,

The, the actor legally, look, there are
some class actions that are questionable,

whether there is a violation and they get
settled because it's cheaper to settle.

You know, I understand that.

But there are great many
who of class actions.

That have a lot of value and, you know,
it stops illegal activity and it does,

um, it, the profits are not, they don't
stay with the, the bank robber, you

know, they, they go back to somewhere.

At least they don't get to keep the
fruits of their illegal activity.

Perfect.

Perfect explanation.

I'm glad I asked the question.

Yeah, it's, it's, it's not a,
it's not a perfect system in,

you know, but it's what we have.

And to be honest, those, a lot
of those types of class actions

are things that a regulator.

Could handle if the regulator had 10
times as many people working in the

field, of course, nobody wants to do that.

So class action sort of takes the
place of a regulator in a lot of ways.

Interesting.

That's I like, I like
how you frame that too.

That's that's that's good.

Yeah.

All right.

Now, quickly, I just want to talk
about, um, because this is always

important is what can the credit union
do to make sure it's in compliance

with ECOA and the regulation.

1st thing is no law be familiar with
the Cohen regulation be and I'll

talk about some resources for that.

Um, make sure the compliance
management system is sufficient.

I know for a lot of smaller credit
unions, if they even have somebody

who's dedicated to consumer
compliance, that that can be a stretch.

And having somebody who would be
dedicated to fair lending is just, you

know, beyond, uh, beyond comprehension.

I mean, the staff is small and I
understand that, but assuming it's

very important to have some type of
compliance management system in place.

So that somebody is looking at these
functions within the credit union things

that also apply to this are training.

Those who are engaged in lending have
to have training on a somewhat regular

basis and fair lending, but not just
those people, there have to be those

who have play any role in the credit
making and improving decision of the

process, but also management because
management has to be able to know that

the CMS staff and the, the credit making
Staff, whoever the lending staff is

that they are also acting properly.

So there has to be proper oversight
within the credit union and you

need to train the people who are
responsible for the oversight.

There also has to be
oversight of third parties.

You know, unfortunately, so many credit
unions, not just credit unions, all the

financial institutions use third party
systems for a lot of the lending process.

Um, and for better or for worse.

The, the creditor itself is responsible
for the acts of the 3rd party.

So you have to have some ability to,
um, have oversight over the indirect

lenders or the vendors, whoever it may be.

And again, I talked
earlier about self testing.

You know, audits and self testing
are ways that you can accomplish

that type of oversight as well.

You can test to see if what's happening is
compliant with the requirements of ECOA.

Finally, in terms of resources on NCUA's
website, there is a Fair Lending Guide.

NCUA sends out regulatory alerts
and letters to credit unions.

We talked about this, referred to some of
them in this and the previous COA podcast.

There's a reason that they do that.

NCOA will only send out these letters
or regulatory alerts if there's

something significant that's taken
place or will be taking place.

So that's a clue right there that if it
says compliance or deals with something

in compliance and you are involved
in compliance, you need to read it.

That's a great point.

That's a great NCOA is seeing trends.

Or irrespective of that, NCOA is going
to start looking at something because a

lot changed or because they've decided to
pocket a certain area of potential law.

Exactly.

And then finally, on the NCUA
website, there is a, what's called

the financial, excuse me, Federal
Consumer Financial Protection Guide,

which is a collection of the exam
procedures for all the different areas.

And there is 1 for ACOA.

So I would urge you to take a look at that
because it has some helpful sections that

can give you some guidance on, it'll tell
you what the examiners are looking at.

When they go out in the field, the
fair lending examiners, especially, and

finally, I would recommend you take a look
at the CFPB's website, consumerfinance.

gov is the website, but find your way
to the fair lending section because

they have a number of fair lending
resources, including those on ECOA.

Fantastic Joe, a lot, a lot, a lot
to unpack here, a lot, a lot of

good information for our listeners.

And Joe, I want to thank you for
being, for sharing your, your

wisdom here with my listeners today.

Good.

Thanks for having me, Mark.

You got it.

And listeners, I want to
thank you for listening.

I hope you'll listen again soon.

This is Mark Treichel signing
off with flying colors.

Thank you for joining us on this episode
of with flying colors, subscribe on

your favorite podcast app to hear future
episodes where subject matter experts

of all varieties will provide tips
on how to achieve success with NCUA.

If you would like to learn more about
how we assist credit unions, check

out our services at marktreichel.

com.