CREDIT GRANTORS STATUTORY REQUIREMENTS UNDER THE EQUAL CREDIT OPPORTUNITY ACT (ECOA)
There have been changes to the Equal Credit Opportunity Act (ECOA) effective April 15, 2004. The credit grantor must now retain records, react within a specified time to a credit applicant’s request, advise the credit applicants of their right to request reasons for denial, and then provide those reasons, if requested. There was another change in which a spouse’s personal guaranty can be a pre-condition of granting unsecured credit in a community property state. A community property state is a state in which the spouse is not required to surrender title rights of assets unless obligated to do so by signing a document, such as a personal guaranty. In those situations not involving a community property state, the personal guaranty from one spouse is sufficient to pursue the assets of a guarantor even if the spouse holds joint custody.
The community property states are Arizona, Colorado, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. The personal guaranty can be a pre-condition of extending credit to an applicant when unsecured debt is involved and now it may also be a pre-condition for a spouse’s personal guaranty in the community property states.
The credit grantor has time frames to respond to a request for credit and, if requested, also the reasons for the adverse action. The time frame to respond to both requests is 30 or 60 days depending upon whether or not the credit applicant’s gross revenues are more or less than $1 million. Credit grantors should also note the importance of “record retention” as mandated by the Equal Credit Opportunity Act.
We obtained permission from Business Credit Magazine to transmit the following article to the clients of Williams & Williams:
The Federal Reserve Board (FRB) has finally published its new rules amending Regulation B of the ECOA. These new rules are consistent with the FRB’s policy of periodically reviewing and updating its regulations. While these new regulations became effective on April 15, 2003, the mandatory compliance date was April 15, 2004. Among the specific provisions of the ECOA of immediate interest to unsecured business credit grantors are: the treatment for noticing of adverse actions, timeliness of noticing, record retention requirements, and signature of spouses or other persons.
The ECOA makes it unlawful for a creditor to discriminate against an applicant in any aspect of a credit transaction on the basis of an applicant’s national origin, marital status, religion, sex, color, race, age, receipt of public assistance benefits, or the good faith exercise of a right under the Consumer Credit Protection Act. Technically, the ECOA is implemented by the FRB’s Regulation B. In August of 1999, the FRB issued proposed rules for the ECOA that covered all elements of the Act from definitions of a “credit application” to the definition of a “creditor” to consideration of the term “adverse action.” In all, the FRB received over 750 comments on the proposed new rules – “a response that delayed publication and implementation of the new rules until 2003 and 2004.
Adverse Action (Section 202.2(c)) – “Under the new regulations, adverse action is defined as a refusal to grant credit in substantially the amount, or on substantially the terms requested in an application, unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered. It also means a termination of an account or an unfavorable change in the terms of an account that does not affect all, or substantially all, of a class of the creditor’s accounts. It could also include a refusal to increase the amount of credit available to an applicant who has made an application for an increase.
It does not mean a change in the terms of an account expressly agreed to by an applicant, nor does it include any action relating to an account taken in connection with inactivity, default, or delinquency.
Business Credit (Section 202.2(g)) – “The FRB has essentially retained the existing consideration of business credit as an extension of credit primarily for business or commercial (including agricultural) purposes. The recommendation that NACM made to the FRB was that the definition of “Incidental credit” should be expanded to include “incidental business credit.” However, many commenters to the FRB opposed this proposal out of concern about possible discrimination against minority-owned businesses. Consequently, the FRB decided that incidental credit would not be expanded to include business credit but would refer only to consumer credit that is extended by a local merchant who does not normally extend credit, for example, to a long-standing customer; or by a doctor or lawyer as an accommodation to a patient or client.
Signature of Spouse or Other Person (Section 202.7) – In general, a creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit. However, if a married applicant requests unsecured credit and resides in a community property state, or if the applicant is relying on property located in such a state, a creditor may require the signature of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary under applicable state law, to make the community property available to satisfy the debt in the event of default.
The FRB failed to include the NACM request that Regulation B be clarified to add tenancy by the entireties states to the provisions of the Act in order to eliminate inconsistent treatment.
Notification of Action Taken (Section 202.9) – The FRB considered additional requirements for noticing and record keeping for business credit grantors. However, the FRB was persuaded that additional provisions of the ECOA to business creditors would not contribute substantially to effectuating the purposes of the Act.
With regard to a business that had gross revenues of $1 million or less in its preceding fiscal year, (other than an extension of trade credit, credit incident to a factoring agreement, or other similar types of business credit), a creditor must respond to an application within 30 days of receiving a completed credit application.
The business creditor may provide a statement of the action taken either orally or in writing, when adverse action is taken. In addition, the creditor is required to disclose that the applicant has a right to statement of reasons pertaining to the credit decision. However, this disclosure may be given at the time of the application, instead of when adverse action is taken, provided the disclosure contains the information required by Regulation B. (This includes the disclosure of the name and contact information of the individual from which the statement of reasons can be obtained and the fact that the applicant can have the statement of reasons provided in writing within 30 days of a written request from the applicant. Additional information required includes the general ECOA prohibitions against discriminatory credit granting practices and the identification of the Federal agency that administers the compliance review of this activity.)
For an application made entirely by telephone, a creditor satisfies the requirements of Regulation B by an oral statement of the action taken, and the applicant’s right to a statement of reasons for adverse action.
With regard to a business that had gross revenues in excess of $1 million in it preceding fiscal year or an extension of trade credit, credit incident to a factoring agreement, or other similar types of business credit, a creditor can notify the applicant either orally or in writing of the action taken. The creditor must provide a written statement of the reasons for adverse action and the ECOA notices specified in Regulation B, if the applicant makes a written request for the reasons within 60 days of the creditor’s notification.
Statements for reasons of adverse action must be specific and indicate the principal reasons for the adverse action. Statements that the adverse action are based on the creditor’s internal standards or policies or that the applicant failed to achieve a qualifying score on the creditor’s credit scoring system are deemed to be insufficient. However, the FRB has published several sample forms for adverse action notification that provide outlines as to the level of detail that must be disclosed under Regulation B.
Also under new guidelines, notification of actions taken may be transmitted by electronic means but they must meet minimum standards as outlined in Regulation B and the Electronic Signatures in Global and National Commerce Act (E-Sign Act [15 U.S.C. 7001]).
Record Retention (202.12) – The FRB has continued with a special rule for the retention of records for business credit applications. For a business that had gross revenues in excess of $1 million in its preceding fiscal year, or an extension of trade credit, credit incident to a factoring agreement, or other similar types of business credit, the creditor shall retain records for at least 60 days after notifying the applicant of the action taken. If within that 60 day period of time the applicant requests in writing the reasons for adverse action or that the records be retained, the creditor shall retain the records for 12 months. (Again, there is no definition of trade credit offered by the FRB in this final rule.)
The anti-discrimination provisions of the ECOA apply to business credit: sex, marital status, age, race, national origin, color, religion, receipt of public assistance.
The ECOA requires that the business applicant be notified within a “reasonable time” of the action taken on the credit application. Thirty days is a reasonable time. This initial notification need not specify the specific reasons for denial of credit. If the business applicant makes a written request for the reasons for credit denial within sixty (60) days after the denial, A CREDITOR will have to provide a written statement of its specific reasons for the adverse action and a prescribed ECOA notice. The attached page is an example of the follow-up notice.
The ECOA will also require A CREDITOR to retain all records relating to a business credit application for at least sixty (60) days after notifying the applicant of the action taken. If within that time period the applicant requests in writing the reasons for the adverse action, or that the records be retained, then A CREDITOR must retain the records for twelve (12) months.
The ECOA does not allow A CREDITOR to automatically require a spouse’s signature on a credit application or personal guaranty.
The ECOA was originally enacted to prohibit consumer credit discrimination based on sex or marital status. The ECOA was soon expanded to prohibit discrimination based on race, color, religion, national origin, age, and public assistance as a source of income – but still only for consumer credit. In 1990, the ECOA was partially expanded to include business credit.
Below is a paraphrase of the coverage of the ECOA as it pertains to spouse’s signatures on guaranties:
When all officers of a closely held corporation are required to personally guarantee a corporate debt, the credit may not automatically require that spouses of married officers also sign. However, an evaluation of the financial circumstances of an officer may indicate that his sole signature is not sufficient. The creditor can require an additional signature on the guaranty, but the corporate officer can choose whom to offer, it may be a spouse or someone else reasonably acceptable to the creditor.
There are nine community property states plus Puerto Rico. The nine are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these nine states, plus Puerto Rico, most property acquired by either spouse during marriage is essentially jointly owned and beyond the reach of creditors of a single spouse in most cases.
FORM C-7 – SAMPLE NOTICE OF ACTION TAKEN AND STATEMENT OF REASONS (BUSINESS CREDIT)
Thank you for applying to us for credit. We have given your request careful consideration and regret that we are unable to extend credit to you at this time for the following reasons:
(insert appropriate reason, such as value or type of collateral not sufficient, lack of
established earnings record, slow or past-due in trade or loan payments)
NOTICE: 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 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: FEDERAL TRADE COMMISSION, EQUAL CREDIT OPPORTUNITY, WASHINGTON DC 20580.
12 CFR Ch. 11 (1-1-91 Edition)
FORM C-8 – SAMPLE DISCLOSURE OF RIGHT TO REQUEST SPECIFIC REASONS FOR CREDIT DENIAL GIVEN AT TIME OF APPLICATION (BUSINESS CREDIT)
If your applicant for business credit is denied, you have the right to a written statement of the specific reasons for the denial. To obtain the statement, please contact (name, address and telephone number of the person or office from which the statement of reasons can be obtained) within sixty (60) days from the date you are notified of our decision. We will send you a written statement of reasons for the denial within thirty (30) days of receiving your request for the statement.
NOTICE: 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 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: FEDERAL TRADE COMMISSION, EQUAL CREDIT OPPORTUNITY, WASHINGTON DC 20580