Compliance Blog

Earlier this week, the National Credit Union Administration (NCUA) issued a letter to credit unions, 22-CU-04, about the Equal Credit Opportunity Act (ECOA). The letter reminded federally insured credit unions that ECOA prohibits credit unions from discriminating against credit applicants because of a prohibited basis (e.g., “race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract); . . . the fact that all or part of the applicant’s income derives from a public assistance program; or . . . the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act”). Under ECOA and Regulation B, the prohibition extends to “any aspect of a credit transaction.”

The letter identified several practices that would be prohibited by ECOA, including the following:

• Failing to give the same information about the application process or underwriting standards to different applicants because of a prohibited basis;
• Discouraging certain applicants from asking about or applying for credit because of a prohibited basis;
• Denying credit or using different underwriting standards because of a prohibited basis;
• Providing applicants with different credit terms because of a prohibited basis;
• Evaluating applicants’ collateral under different standards because of a prohibited basis;
• Varying default remedies or loan servicing treatment because of a prohibited basis; or
• Differentiating between different loans when pooling them together for sale in the secondary market because of a prohibited basis.

The letter explained that credit unions cannot treat applicants, co-applicants, and borrowers differently because of a prohibited basis. The letter noted that credit unions also cannot discriminate on the basis of a prohibited basis against spouses and people who occupy a property being financed. The letter also suggested that ECOA proscribes discriminating along a prohibited basis due to “the characteristics of the neighborhood or other area where property to be financed is located.”

In the letter, NCUA addressed these particular areas of fair lending risk:

• Discriminating against applicants based on marital status. NCUA discussed the prohibition against requiring a spouse to sign as an additional party if an additional party is needed to satisfy the credit union’s creditworthiness benchmarks. NCUA distinguished between this prohibited practice and when a credit union may require a spousal signature (e.g., when it needs to ensure that it has an enforceable security interest under state law). NCUA explained that a common ECOA violation is when credit unions “price loans based on the higher of the two applicants’ credit scores when they are married but based on the primary applicant’s credit score when the applicants are unmarried.”
• Discriminating against applicants because of age. The letter noted that credit unions “cannot take into account an applicant’s age, provided the applicant has the capacity to enter into a binding contract.” Under ECOA and Regulation B, credit unions can consider age in certain limited circumstances, including favoring elderly applicants (those 62 or older) and “as a predictive variable if the age of an elderly applicant is not assigned a negative factor or value and the creditor is using an empirically derived, demonstrably and statistically sound, credit-scoring system.” The letter also noted that in a system that is not an empirically derived, demonstrably and statistically sound, credit-scoring system “a creditor may consider the applicant’s occupation and length of time to retirement to determine whether the applicant’s income (including retirement income) will support the extension of credit to its maturity.”
• Discriminating against applicants because of the applicants’ income source. When evaluating an application, the letter explained that credit unions cannot exclude certain income because of a prohibited basis or because the income is from part-time employment or retirement benefits. Under ECOA and Regulation B, credit unions cannot treat applicants on maternity or paternity leave as unemployed when underwriting loans. They also cannot exclude public assistance or retirement income when evaluating applications. That said, the letter suggested that credit unions are allowed to “consider the amount and probable continuance of any income in evaluating an applicant’s creditworthiness.”
• Redlining. The letter noted that redlining involves situations in which credit unions “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.” NCUA clarified that credit unions can review whether they are making credit equally accessible to all people within their fields of membership by performing statistical analyses of their lending inside their respective service areas and analyzing where their mortgage loan officers are located and their mortgage loan advertisements.
• Issues with indirect lending. NCUA discussed the fair lending risk that can arise when a credit union’s indirect lending program allows dealers to use discretion in marking up the interest rate that borrowers receive on their indirect automobile loans. This discretionary mark up is a way for dealers to increase their compensation for the indirect loans. The letter admonished credit unions that permit discretionary dealer mark ups to “ensure their fair lending compliance management systems are sufficiently robust to enable the credit union to measure and address prohibited basis pricing disparities.”

The letter explained that credit unions looking for more guidance on fair lending issues can look to the Interagency Fair Lending Examination Procedures. Credit unions can also contact NCUA’s Office of Consumer Financial Protection.