The Equal Credit Opportunity Act: avoid the pitfalls.(credit column)

The Equal Credit Opportunity Act (the "ECOA" or the "Act") subtly pervades many aspects of American life and business. Many creditors are aware of the Act's more visible manifestations while remaining in the dark about some of the Act's less visible provisions. Perhaps most importantly, the majority of press and attention given to the ECOA focuses on the protections granted by the Act with respect to consumers. Many are unfamiliar with the protection provided by the Act to corporate or other non-consumer customers. A lack of knowledge of the specific requirements under the Act may leave sellers exposed to claims of discrimination by individual consumers, potential non-consumer buyers or, more importantly, from a class action filed against your company.

In the February issue, we discussed what should be considered in designing or reviewing your current credit application. Each credit application, and all other means of obtaining information from a potential buyer, should also be evaluated to make sure that you are complying with ECOA requirements. Companies reviewing credit applications of their business customers are not immune from having charges made against them for ECOA violations. Many of these cases involve less visible ECOA provisions, such as its notification requirements. In a recent case brought in an Indiana federal court, the court found a bank liable under the Act for failure to provide a business applicant notice of an adverse action within 30 days.

The wide breadth of the ECOA causes it to affect many businesses that routinely evaluate the creditworthiness of their customers. For this reason it is important for all businesses involved in selling on credit, even those only tangentially connected, to have procedures in place and employees trained in those procedures in order to ensure effective compliance with the law. Congress wrote the ECOA in broad language and it is interpreted by Federal Regulation B in even more expansive terms. All businesses that deal with any type of credit transaction need to be aware of the Act's provisions and be cognizant of simple steps they can take to avoid liability under the Act. The 10 questions and answers that follow are designed to give businesses involved in credit transactions a better understanding of the Act's breadth and the preventive measures they can take to help manage their liability risks.

What Is the Equal Credit Opportunity Act?

The ECOA is a subchapter of the Federal Consumer Credit Protection Act. Regulation B, issued by the Board of Governors of the Federal Reserve System, provides guidance regarding the interpretation and enforcement of the ECOA. The ECOA prohibits any creditor from discriminating against any applicant for credit with respect to race, color, religion, sex, marital status, age, participating in public assistance programs or for exercising his or her rights under the Act. A creditor is deemed to have discriminated under the Act if it treats an applicant or potential applicant less favorably based upon one of the above factors. In addition, under the ECOA, a creditor is liable for any statement, in advertising or otherwise, that might discourage on a prohibited basis a reasonable applicant or prospective applicant from applying for credit from the particular creditor. It is important to recognize that discrimination under the ECOA is measured by an "effects test" and is not simply based upon ill or malicious intent. Thus, even if a creditor does not intentionally mean to discriminate, it can be held liable under the Act if the effects of its action result in discrimination toward one of the above protected groups.

To establish a prima facie case under the ECOA, a plaintiff must establish four elements. First, it must establish that it is a member of a protected class. Second, it must demonstrate that it applied for and was denied credit. Third, the plaintiff must be denied credit. Finally, the creditor must continue to approve credit applications for applicants with qualifications similar to those of the plaintiff.

Who Qualifies as a Creditor Under the ECOA?