1977, July, Pg. 1118. The Equal Credit Opportunity Act Revisited.

• Author: by Richard M. Koon

6 Colo.Law. 1118

Colorado Lawyer

1977.

1977, July, Pg. 1118.

The Equal Credit Opportunity Act Revisited

1118Vol. 6, No. 7, Pg. 1118The Equal Credit Opportunity Act Revisitedby Richard M. KoonRichard M. Koon, Denver, is a partner in the firm of Holland & Hart.1119The Equal Credit Opportunity Act (ECOA) and implementing Regulation B initially went into effect October 28, 1975,(fn1) with the basic purpose of making it unlawful for creditors to discriminate against applicants on the basis of sex or marital status with respect to any aspect of a credit transaction. Many of the provisions contained in the Regulation had delayed effective dates running to January, June, and November of 1976.

Even before creditors had settled in, the Act was amended and the Regulation rewritten, effective March 23, 1977.(fn2) This article is intended to supplement, and therefore update, an article which appeared in the August 1976 issue of The Colorado Lawyer by this author entitled "Skimming the Equal Credit Opportunity Act."(fn3) Much of the discussion in that article remains viable under the amendments.(fn4) As with the earlier article, the thrust of this article will be to the practical to provide basic background familiarity over the subject matter to lawyers whose main fields of specialty and expertise do not include areas such as the ECOA.

The article will first discuss some of the more significant changes brought about by the amendment to the Act and the reissuance of Regulation B. The second portion of the article covers those areas which are the subject of the most frequent inquiries.

The main sources of research include the Act, which is Title VII of the Consumer Credit Protection Act, Regulation B, interpretations issued by the Federal Reserve Board, Official Staff Interpretations issued by the staff of the FRB and unofficial staff interpretations.(fn5) All of these materials can be found in the Commerce Clearing House, Inc. publication entitled Consumer Credit Guide. Note particularly that all the Public Information Letters generated prior to the amendment have been rescinded, although five have been reissued, four as unofficial staff opinion letters and one as an Official Staff Interpretation.

PRINCIPAL CHANGES

Prohibited Bases Expanded---Effects TestThe ECOA prohibits creditors from discriminating against any applicant regarding any aspect of a credit transaction on any of the enumerated prohibited bases. These have been expanded beyond sex and marital status to include seven new bases: race, color, religion, national origin, age (other than minimum

1120statutory age for entering into binding contracts), the receipt of income from a public assistance program, and good faith exercise of any right under the Consumer Credit Protection Act.(fn6)Those personal characteristics listed as being included in the prohibited bases refer not only to characteristics of the applicant (including partners or officers of the applicant) but also refer to personal characteristics of individuals with whom the applicant deals. For example, a creditor may not discriminate against an applicant simply because of the applicant's dealings with individuals of any particular race, religion or national origin, or because the transaction to which the credit extension relates involves individuals having one or more of these personal characteristics.

In making a determination as to whether discrimination exists, the legislative history of the Act(fn7) specifically directs the Board of Governors and the other enforcement agencies to use the principles arising out of employment discrimination cases as guides. Cases such as Griggs v. Duke Power Company(fn8) and Albermarle Paper Company v. Moody(fn9) have established the so-called "effects test" wherein employment practices have been outlawed which had the effect of discriminating, regardless of the employer's motive in adopting the practice. These cases remove the need to prove racial purpose or invidious intent to establish a violation of Title VII of the Civil Rights Act of 1964. However, since the legislative history, the United States Supreme Court handed down its decisions in General Electric v. Gilbert(fn10) and Washington v. Davis,(fn11) which appear to cast doubt on the scope, if not on the very existence, of the effects test.

It is not clear exactly how courts might apply the employment practice effects test in the area of credit decisions. It is possible that a plaintiff could establish a prima facie case by showing that a given standard of credit-worthiness relied on by a creditor results in the rejection of a disproportionately high percentage of credit applications from members of one of the protected classes. It would then be incumbent upon the creditor to show that this standard is applied to all applicants and has a manifest relationship to credit-worthiness.(fn12) The next move would then be the applicant's to show that an alternative credit standard would do the job for the creditor and have a lesser adverse impact upon the members of the protected class.

Model FormsThe FRB provided as Appendix B to Regulation B model credit application forms dealing with various types of credit transactions. Use of the forms is not mandatory; however, the Regulation provides that creditors using the forms verbatim or modified as permitted will be "deemed to be acting in compliance" with certain provisions of the Regulation.(fn13) Also deemed to be in compliance is the form used by many mortgage lenders and designated "FHLMC 65/FNMA 1003 (Rev. 3/77)."(fn14) Creditors are specifically permitted to use any application form which complied with the pre-amendment requirements until their present stock is exhausted or until March 23, 1978, whichever is earlier.(fn15)

Monitoring InformationAs an assist in enforcement efforts creditors are required to request certain "monitoring information" with respect to any application for consumer credit to purchase residential real property where the loan is to be secured by a lien on the property.(fn16) "Residential real property" is defined as improved property used or intended for residential purposes and includes dwellings designed for from one to four families and individual units of condominiums or cooperatives.(fn17) A construction loan would not require the

1121monitoring information unless it was intended to provide permanent financing as well.(fn18) Monitoring information would be required with respect to a "bridge loan" if secured by property the borrower is purchasing, rather than the property the borrower is hoping to sell. A home improvement loan would not be for the purchase of the property and therefore would not be covered. Similarly most debt consolidation or special purpose loans secured by a second lien (or for that matter a first lien) on residential real property would not be covered. A loan secured by a second lien on residential real property would be covered if the loan was made in connection with the purchase of the property.The information to be requested of the applicant, and joint applicant, if any, includes race/national origin (certain specific categories must be used), sex, marital status (the only categories which may be used are married, unmarried and separated) and age. The information may be requested on the application form or a separate form specifically referring to the application. The creditor must inform the applicant that the information is being requested by the Federal Government to monitor compliance with federal antidiscrimination statutes. The creditor cannot require the applicant to supply the information, and a refusal may not be used against the applicant. In the event the applicant or joint applicant chooses not to furnish all or a part of the information, the creditor must note that fact on the form.

ECOA NoticePrior to the amendments, creditors were required to provide each applicant with a Notice in a writing that the applicant could retain advising that the creditor was prohibited from discriminating against the applicant on the basis of sex or marital status and setting forth the name and address of the federal agency administering compliance with respect to the particular creditor. The specific language was prescribed verbatim by the Regulation.

The amendments changed the text of the Notice somewhat to include reference to all of the new prohibited bases.(fn19) More importantly, creditors are no longer required to give this notice to all applicants, but only those to whom the notification of adverse action must be given, as

1122discussed below. The text of the Notice is required to be in "substantially" the following form: The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided that the applicant has the capacity to enter into a binding contract); because all or part of the applicant's income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The Federal agency that administers compliance with this law concerning this creditor is (name and address as specified by the appropriate agency listed in Appendix A to Regulation B).

Notifying the Applicant of Grant of Credit as RequestedThe applicant must be notified of the action the creditor has taken within 30 days after receipt of...