If you feel discriminated against when applying for a credit card loan, you are protected under the Credit Equality Act. For example, lenders cannot deny you a loan based on reasons such as your marital status, gender or religion.
But what happens after the loan is completed? Do these protections still apply?
The Consumer Financial Protection Bureau clarified that the 1974 ECOA protects borrowers from discrimination during the loan period, not just the loan application process.
The CFPB’s position specifically requires lenders to issue adverse action notices when their actions adversely affect borrowers’ access to credit, even after the loan is completed. This can happen, for example, if your credit limit is reduced. Lenders also can’t be more aggressive in their collection activities against certain borrowers based on their ethnicity.
ECOA protection extends to loan term
This comes after consumers sued Bank of America for closing their credit card accounts for no reason (as required by ECOA). The CFPB filed an amicus brief in the case, saying that “ECOA’s important safeguards against credit discrimination do not disappear the moment credit is granted.” Instead, ECOA “protects existing borrowers from discrimination in all aspects of loan arrangements”.
Bank of America has said that as far as existing customers are concerned, it does not have to comply with ECOA regulations. It appears that other banks have made such arguments.
For this reason, the CFPB believes it is necessary to clarify that ECOA protections apply to the entire life cycle of a loan, not just at the time of loan application. The Consumer Protection Agency can also use its powers to monitor unfair, deceptive and abusive practices to curb loan discrimination.
Odette Williamson, associate attorney with the National Consumer Law Center, noted that ECOA protects applicants, including existing customers, “in every aspect of the credit transaction.”
“While these safeguards are not new, it would be helpful for the Bureau to release an opinion that highlights the implementation of the ECOA, the legislative history, and the opinion of Reg. B.,” Williamson said. “We want the bureau to go a step further and take enforcement action in line with those that violate the law.”
At least one law firm advises clients to “be aware of the agency’s position and review its credit management policies, procedures and practices accordingly, as examiners will no doubt do the same.”
However, Arnold & Porter added that the scope of the term “applicant” used in the ECOA has not been clarified (by the courts or further legislation).
There are no exceptions to algorithm-based rejection
In a further move aimed at clarifying ECOA protections, the CFPB said lenders who make lending decisions based on computerized algorithms must also provide explanations when borrowers are denied credit.
Rohit Chopra, director of the CFPB, said: “The law gives each applicant the right to a specific explanation when their loan application is rejected, and that right is not limited by companies using complex algorithms that they do not understand.”
Creditors are not exempt from their ECOA obligations, even if the technologies they use are still being tested and they find them too complex, too “opaque” or too new to make decisions.
In a blog post, Troutman Pepper’s attorney Chris Willis said ECOA is no exception to machine learning models or decisions based on other types of underwriting, and the CFPB doesn’t really need clarification.
“It is even more difficult to understand why the bureau has not provided guidance on the appropriate method for machine learning models to derive reasons for bad behavior,” Willis wrote, considering the inconsistencies in how bad behavior feedback should be provided in the new underwriting approach, Willis wrote. Certainty, Willis wrote.
Ed Mierzwinski, senior director of the US Public Interest Research Group, however, said: “The CFPB’s actions show it will insist that lenders cannot simply tell consumers, ‘We either don’t understand what the secret but superintelligent black box AI says, or we don’t want to tell it. They. You.'”
Sex discrimination ban also applies to LGBTQ borrowers
In another attempt to strengthen ECOA protections, the CFPB clarified in 2021 that the law’s prohibition on sex discrimination extends to discrimination based on sexual orientation and gender identity.
The CFPB took this action after a period of public feedback after the Supreme Court clarified that Civil Rights Act protections from sex discrimination extend to discrimination based on sexual orientation and gender identity.
“It’s difficult to quantify the impact of the CFPB’s actions,” Williamson said, “but we applaud efforts to reduce discrimination and improve access to credit for LGBTQ+ consumers.”
While all of these CFPB efforts to expand ECOA protections have yet to yield tangible results, they have at least made lenders more vigilant about enforcing protections.
“It’s safe to say that lawyers in the financial industry have been doing two things lately: admonishing their clients to tread carefully, and bemoaning Congress and the trade press for this pesky CFPB,” Mierzwinski said.
While issuing the guidance helps lenders unable to bypass ECOA protections, Williamson said it is now up to the CFPB to back its clarification and “take enforcement action against violations.”
The CFPB made some clarifications to the Equal Credit Opportunity Act, making it clear that lenders cannot ignore the spirit of the Act, which prohibits discrimination against lenders. While these actions have yet to have any real impact, they at least remind lenders that the CFPB is monitoring whether they have strengthened ECOA safeguards.