A Fresh Look at the Equal Credit Opportunity Act

When most people think of the Equal Credit Opportunity Act (ECOA), they probably think of discrimination. After all, the ECOA, which was passed in 1974, prohibits creditors from denying credit to applicants on the basis of race, color, religion, national origin, sex, marital status, or age, because an applicant receives income from a public assistance program, or because an applicant has in good faith exercised any right under the Consumer Credit Protection Act. The ECOA applies to all types of credit extensions, including car loans, home loans, credit card loans, and small business loans. 

What is perhaps not so widely known is that there are other provisions in the ECOA and in “Regulation B,” which is the main administrative regulation that implements the ECOA, that are equally important. One of these provisions concerns the extent to which a lender may obtain information from an applicant’s spouse or former spouse in the process of making a credit decision, and whether a lender may require a spouse to be a co-applicant where the lender is clearly relying on financial wherewithal of the original applicant in evaluating the application and ultimately making the credit decision.

Regulation B generally prohibits lenders from requesting information about an applicant’s spouse or former spouse except under certain specific circumstances, such as where the non-applicant spouse will be a user of or joint obligor on the account; the non-applicant spouse will be contractually liable on the account; the applicant is relying on the spouse’s income, at least in part, as a source of repayment; the applicant resides in a community property state, or the property upon 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 income as a basis for obtaining the credit. In addition, with certain exceptions, a creditor may not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested. The submission of a joint financial statement or other evidence of jointly held assets is not considered an application for joint credit.

When the ECOA was first enacted, the Federal Reserve Board (Fed) was responsible for drafting and interpreting Regulation B. Enforcement responsibility, however, rested with the creditor’s functional regulator (or, for any category not so assigned, with the Federal Trade Commission).  When the Dodd-Frank Act (DFA) was passed in 2010, rulemaking authority for consumer-oriented financial regulations (such as Regulation B) was transferred from the functional banking agencies to the Consumer Financial Protection Board (CFPB) as of July 21, 2011.  Because of the DFA, drafting and issuing of consumer-oriented financial regulations is now with the CFPB.  Enforcement of those regulations, however, remains with the institution’s functional regulator in institutions of $10 billion or less.   The CFPB enforces such regulations in financial institutions greater than $10 billion. 

Regulation B is a rather strange animal:  it is actually contained in two places in the Code of Federal Regulations (CFR). The CFPB issued its version of Regulation B when it received rulemaking authority under the DFA; however, the Fed, the original author of Regulation B, never removed it from its own part of the CFR.

Recently, I had occasion to assist in a case involving a lender that required an applicant’s spouse to become a co-applicant for a business loan even though the applicant individually qualified for credit under the lender’s underwriting standards; the lender was relying entirely on the original applicant’s financial capability; and the spouse had only a nominal income from a completely separate business from the original applicant and had no involvement in the original applicant’s business. The only explanation for requiring the spouse to become a co-applicant appeared to have been that this was simply “the way [the lender] had always done it.”

It remains to be seen how this case will be resolved. There is, however, a message for lenders:  if a lender seeks to require a spouse to be a co-applicant for a loan, make certain that there is a good credit underwriting-related reason for doing so. 

Prepared by Gary Gegenheimer – September 2024

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Terry Stroud

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