Letter to Credit Unions 22-CU-04: Equal Credit Opportunity Act Nondiscrimination Requirements
The Equal Credit Opportunity Act (ECOA) promotes the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract); to the fact that all or part of the applicant’s income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. ECOA prohibits creditor practices that discriminate on the basis of any of these factors. The National Credit Union Administration (NCUA) supervises for compliance with and enforces ECOA with respect to federal credit unions that have $10 billion or less in total assets. Additionally, ECOA requires the NCUA to refer certain violations to the U.S. Department of Justice (DOJ).
ECOA prohibits discrimination in any aspect of a credit transaction. It applies to any extension of credit, including extensions of credit to small businesses, corporations, partnerships, and trusts.
Disparate treatment occurs when a lender treats a credit applicant or prospective applicant differently based on one of the prohibited bases defined in ECOA. The existence of illegal disparate treatment may be established either by statements, policies, or guidelines revealing that a lender explicitly considered prohibited factors, or by differences in treatment that are not fully explained by legitimate nondiscriminatory factors. It does not require showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself.
The LTCU notes five fair lending risk areas that credit unions should be aware of:”
Applicant Marital Status: Except as otherwise permitted or required by law, a creditor must evaluate married and unmarried applicants using the same standards. However, A creditor may consider an applicant’s or joint applicant’s marital status to determine the creditor’s rights and remedies applicable to a particular extension of credit.
Applicant Age: Except as permitted, a creditor cannot take into account an applicant’s age, provided the applicant has the capacity to enter into a binding contract. Credit unions using automated underwriting systems should ensure the system’s settings comply with ECOA’s requirements and do not result in age discrimination.
Income Consideration: Creditors may not discount or exclude from consideration the income of an applicant or the spouse of an applicant because of a prohibited basis or because the income is derived from part-time employment or is an annuity, pension, or other retirement benefit. However, a creditor may consider the amount and probable continuance of any income in evaluating an applicant’s creditworthiness.
Redlining: “Redlining,” as defined by DOJ, is an illegal practice in which lenders avoid providing services to individuals living in communities of color because of the race or national origin of the people who live in those communities. Credit unions, especially those with fields of membership defined by, or partially defined by, geography, such as community charters and underserved areas, must ensure they provide equal access to credit in the areas defined by their fields of membership.
Indirect Lending: Credit unions with indirect lending programs use various methods to compensate automobile dealers for loan transactions, including the use of discretionary markups – which allow dealers to establish their own compensation by increasing the interest rate above the credit union “buy rate” on a discretionary basis, within an established limit. Discretionary markups allow a dealer to affect the cost of financing on an individual and discretionary basis. For this reason, the use of discretionary markups presents fair lending risks not usually associated with flat fee or flat percentage compensation structures. Credit unions that permit discretionary markups should ensure their fair lending compliance management systems are sufficiently robust to enable the credit union to measure and address prohibited basis pricing disparities.
For more information on managing compliance risks, see NCUA Letter to Credit Unions, 17-CU-02, Risk-Focused Examinations and Compliance Risk. For information on fair lending risk factors, including compliance program risk factors and overt indicators of discrimination, see the Interagency Fair Lending Examination Procedures.