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If you ever feel discriminated against in the process of obtaining a credit card loan, you have protection under the Equal Credit Opportunity Act. For instance, a lender cannot deny you credit based on your marital status, sex or religion, among other factors.
What happens after you close on the loan though? Do those protections still apply?
The Consumer Financial Protection Bureau has clarified that the ECOA, enacted in 1974, protects borrowers from discrimination for the life of a loan and not just during the loan application process.
The CFPB’s stand explicitly calls for lenders to provide a notice of adverse action when their actions unfavorably impact a borrower’s access to credit, even after a loan closes. This might come about if your credit line is cut down, for one. Lenders also cannot more aggressively pursue collection activity against certain borrowers, based on their race.
ECOA protections extend through life of loan
This comes about after a consumer sued Bank of America for closing his credit card account without providing an explanation (as required under the ECOA). The CFPB had filed a “friend of the court” brief in that case, stating that the “ECOA’s crucial protections against credit discrimination do not disappear the moment that credit is extended.” Rather, ECOA “shields existing borrowers from discrimination in all aspects of a credit arrangement.”
Bank of America had indicated it need not adhere to the ECOA provisions when it comes to its existing customers. It seems other banks have made this sort of argument.
That’s why the CFPB deemed it necessary to spell out that ECOA protections apply for the life of a loan, and not just at the point of a loan application. The consumer protection agency can also draw on its authority to police unfair, deceptive and abusive practices to rein in lending discrimination.
Odette Williamson, a staff attorney with the National Consumer Law Center, noted that the ECOA protects applicants in “any aspect of a credit transaction,” which includes existing customers.
“While these protections are not new it is helpful for the Bureau to issue the Advisory Opinion highlighting the statute, legislative history and Reg B. which implements the ECOA,” Williamson says. “We expect the Bureau to go a step further and bring enforcement action consistent with its Advisory Opinion for those actions that violate the Act.”
At least one law firm is advising its clients that they “should take note of the agency’s position and review their loan servicing policies, procedures, and practices accordingly, as examiners will undoubtedly do the same.”
However, the firm, Arnold & Porter, adds that the scope of the term “applicant” as used in the ECOA is yet to be settled (by courts or through further legislation).
No exemptions for algorithm-based denials
In another move that seeks to clarify ECOA protections, the CFPB has stated lenders that make credit decisions based on computerized algorithms also have to provide an explanation if borrowers are denied credit.
“The law gives every applicant the right to a specific explanation if their application for credit was denied, and that right is not diminished simply because a company uses a complex algorithm that it doesn’t understand,” says CFPB Director Rohit Chopra.
Creditors are not absolved of their ECOA duties, even if the technologies they use are still being tested and they consider them too complicated, too “opaque” in decision-making or too new.
In a blog post, Chris Willis, an attorney with Troutman Pepper, says the ECOA does not make an exception for machine-learning models, or decisions based on any other kind of underwriting, and there is no real need for the CFPB to clarify this.
“What is even more difficult to understand is why the Bureau has not provided any guidance on the appropriate method for deriving adverse action reasons for machine learning models,” given there is uncertainty about how to provide adverse action feedback with newer underwriting approaches, Willis writes,.
However, says Ed Mierzwinski, senior director, U.S. Public Interest Research Group, “the CFPB’s actions indicate that it will insist that lenders cannot merely tell consumers ‘we either don’t understand what the secret but super-smart black box AI said, or we don’t want to tell you.’”
Ban on sex-based discrimination extends to LGBTQ borrowers
In another attempt to shore up ECOA protections, the CFPB clarified in 2021 that the ban against discrimination based on sex in that law also extends to discrimination based on sexual orientation and gender identity.
That action followed a period of public feedback that the CFPB solicited after the Supreme Court clarified that protection against sex discrimination under the Civil Rights Act also extends to discrimination based on sexual orientation and gender identity.
“It is difficult to quantify the impact of the CFPB’s action,” Williamson says, “but we applaud efforts to dismantle discrimination and increase access to credit for LGBTQ+ consumers.”
While all these CFPB efforts to broaden ECOA protections have not yet led to any tangible results, they’ve at least had the effect of making lenders more watchful about treading on protections.
“I can certainly say that financial industry hired-gun lawyers are doing two things lately: urging their clients to be careful and whining to Congress and the trade press about that pesky CFPB,” says Mierzwinski.
While it’s helpful to issue guidance so that lenders cannot get around ECOA protections, it is now up to the CFPB to back up its clarifications “with enforcement actions where there are violations,” according to Williamson.
The bottom line
The CFPB has made a few Equal Credit Opportunity Act clarifications that make it clear lenders cannot ignore the spirit of this law banning discrimination by lenders. While there is no tangible impact yet from these actions, they have at least put lenders on notice that the CFPB is watching if they tread on ECOA protections.