|Regulation B was issued by the Federal Reserve Board
to implement the Equal Credit opportunity Act (ECOA).
The regulation bans credit discrimination for reasons of
sex, marital status, race, color, religion, national origin,
and age. It provides individuals and companies with the
right to know why they were denied credit. The
discrimination ban also protects people who receive
welfare and other public assistance income and
borrowers who exercise their rights under the Consumer
Credit Protection Act ( which includes the Truth in
Lending, Fair Credit Reporting, Fair Credit Billing, Equal
Credit Opportunity, Consumer Leasing, and Debt
Collection Practices Acts).
|How does it apply to business to business credit?
Generally speaking, the Equal Credit Opportunity Act
applies to consumer credit as a whole. However, the Act
also applies to businesses granting credit to other
businesses, in so far as a creditor may not discriminate
on the basis of sex, marital status, race, color, religion,
national origin, and age.
Since the Act applies mostly to consumer credit, there
are some things that a business creditor should do to
legally protect themselves.
|What are the rules under the ECOA for business to
The basic rules of the ECOA and Regulation B state that
a business credit grantor cannot:
- Discriminate against an applicant regarding any
aspect of the credit transaction.
- Make any oral or written statement, in advertising or
otherwise, to applicants or prospective applicants, that
would discourage a reasonable person from making or
pursuing an application.
- Inquire whether income stated in an application is
derived from alimony, child support, or separate
maintenance payments unless the creditor discloses to
the applicant that such income need not be revealed if
the applicant does not want the creditor to consider it in
determining the applicant’s credit worthiness.
- Inquire about the sex of the applicant.
- Inquire about birth control practices, intentions
concerning the bearing or rearing of children, or
capability to bear children.
- Inquire about the race, color, religion or national origin
of the applicant.
- Request any information about the spouse of an
applicant unless the spouse will be permitted to use the
account; the spouse will be contractually liable on the
account; the applicant is relying on the spouse’s income
as a basis for repayment of the credit requested; the
applicant resides in a community property state or
property on which the applicant is relying as a basis for
repayment of the credit requested is located in such a
state; or the applicant is relying on alimony, child
support, or separate maintenance payments from a
spouse as a basis for repayment of the credit requested.
- Inquire about the applicant’s marital status unless the
applicant resides in a community property state, or is
relying on property located in such a state as a basis for
repayment of the credit requested.
The last two factors listed also come into play on
personal guaranties. The ECOA does not permit a
credit grantor to require a spouse to sign a personal
guaranty if that spouse is not directly involved with the
business credit applicant. Care must be taken to make
sure that there are policies established for dealing with
this, so that there is not an accidental non-compliance.
The law does permit a spouse to sign a personal
guaranty if certain detailed procedures are followed.
First, the creditor must establish that the applicant is not
creditworthy. Once the fact that the applicant does not
meet creditworthiness criteria has been independently
established, the business credit grantor would then have
to deny the request or ask for additional financial
information before looking to a guaranty. Should the
applicant volunteer the additional guaranty of a spouse,
even though that spouse is not directly involved in the
business, it is permissible for the spouse to sign the
guaranty; it must be voluntary. This is a very
complicated procedure and competent counsel should
be consulted in order to establish the appropriate
policies and procedures for each company.
|What is an adverse action?
1) Refusal to grant credit
A refusal to grant credit occurs when the credit is
denied in substantially the amount or terms requested
by the credit applicant. However, if the business credit
grantor makes a counter offer to grant credit in a
different amount or on other terms and the application
accepts the counter offer, this action is not considered
an adverse action. For example, if the applicant appied
for $100,000 in credit availablitiy and the business
credit grantor offers to extend $10,000 rather than the
$100,000, and the applicant accepts this offer, the
action is not considered adverse.
2) Refusal to increase credit on existing account.
This situation occurs when an existing customer
requests additional credit and that request is denied.
This action is considered as adverse action.
3) Termination of credit on an existing account
This situation occurs when credit is terminated. For
example, if a customer is placed on COD because of it’
s credit history, credit has been effectively terminated.
Adverse action does not include a change in terms
when agreed to in writing by an applicant or any action
relating to an account taken in connection with
inactivity, default or delinquency of that account.
Business and trade credit grantors may rely on special
rules provided in Section 202.9 of Regulation B with
regard to multiple applicants, incomplete applications,
notifications by small volume creditors, withdrawn
applications and third party applications.
|Link to Page 2 of Equal Credit Act