The Equal Credit Opportunity Act and the Federal Reserve Board’s implementing Regulation B, prohibit discrimination in any aspect of a credit transaction on the basis of::

• Race

• Color

• Religion

• National Origin

• Color

• Sex

• Marital Status

• Age

• Receipt of income from a public assistance program

• The good faith exercise of any right under the Consumer Credit Protection Act

These factors are referred to throughout the regulation as “Prohibited practices.” Regulation B deals with taking, evaluating and acting on applications for credit and the furnishing and maintenance of credit information. It does not prevent a creditor from obtaining information necessary to evaluate the credit worthiness of an applicant.

Public assistance programs include but are not limited to Aid to Families with Dependant Children (AFDC), food stamps, rent or mortgage supplements or assistance programs, Social Security, and Supplemental Security Income, (SSI), and unemployment compensation. Only physicians hospitals and others to whom the benefits are payable need consider Medicare and Medicaid as public assistance.

The types of credit transactions that are protected by ECOA include, but are not limited to, business loans, consumer leases, consumer loans, auto loans, credit cards, agricultural loans and loans to purchase, improve, refinance or construct residential or commercial real estate. If the credit transaction provides for a deferral of a payment of debt, it is also covered by ECOA and Regulation B, even though it may not be defined as a credit transaction by the Truth in Lending Act, Regulation Z.

The Equal Credit Opportunity Act and Regulation B also prohibit discrimination against an applicant because of the applicant’s race, color, sex, religion, national origin, marital status or age of the applicant or corporate officers; because of whom applicant associates or affiliates with, because of applicant’s personal or business dealings with members of a certain religion, or because of the persons who will be related to the extension of credit (for example, tenants in the apartment complex being financed or the individuals who reside in the neighborhoods where the collateral is located).

A creditor may however, take into account the applicant’s immigration status and any applicable law, regulation or executive order restricting dealings with citizens or the government of a particular country.

Definitions:

Applicant: Any person who requests or who has received an extension of credit form a creditor, and includes any person who is, or may become, contractually liable regarding an extension of credit. This term also includes guarantors, sureties, endorsers and similar parties.

Application: An oral or written request for an extension of credit that is made in accordance with procedures established by a creditor of the type of credit requested. The term does not include the use of an account or line of credit to obtain an amount of credit that is within a previously established credit limit.

Completed Application: An application where the creditor has received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested (including, but not limited too, credit reports, any additional information requested from the applicant, and any approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure, or provide security for the credit or collateral). The creditor shall exercise reasonable diligence in obtaining such information.

Credit: The right granted by a creditor to an applicant to: defer payment of a debt; incur debt and defer its payment; purchase property or services and defer payment therefore.

Creditor: A person who, in the ordinary course of business regularly participates in the decision of whether or not to extend credit. The term includes a creditor’s assignee, transferee, or subrogee who so participates. The term also includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit are made. A person is not a creditor regarding any violation of the act or this regulation committed by another creditor unless the person knew or had reasonable notice of the act, policy, or practice that constituted the violation before becoming involved in the credit transaction. The term does not include a person whose only participation in a credit transaction involves honoring a credit card.

Credit Transaction: Every aspect of an applicant’s dealings with a creditor regarding an application for credit or an existing extension of credit (including, but not limited to, information requirements; investigation procedures; standards of creditworthiness; terms of credit; furnishing of credit information; revocation, alteration, or termination of credit; and collection procedures).

Empirically Derived and Other Credit Scoring Systems: A system that evaluates an applicant’s creditworthiness mechanically, based on key attributes of the applicant and aspects of the transaction, and that determines, alone or in conjunction with an evaluation of additional information about the applicant, whether an applicant is deemed creditworthy. To qualify as an empirically derived, demonstrably and statistically sound, credit scoring system, the system must be:

• Based on data that are derived from an empirical comparison of sample groups or the population of creditworthy and non-creditworthy applicants who applied for credit within a reasonable period of time

• Developed for the purpose of evaluating the creditworthiness of applicants with respect to the legitimate business interests of the creditor utilizing the system (including, but not limited to, minimizing bad debt losses and operating expenses in accordance with the creditor’s business judgment)

• Developed and validated using accepted statistical principles and methodology

• Revalidated periodically by the use of appropriate statistical principals and methodology and adjusted as necessary to maintain predictive ability

A creditor may use an empirically derived, demonstrably and statistically sound, credit scoring system obtained from another person or may obtain credit experience from which to develop such a system. Any such system must satisfy the criteria set forth above. If the creditor is unable during the development process to validate the system based on its own credit experience, the system must be validated when sufficient credit experience becomes available.

Extend Credit and Extension of Credit: The granting of credit in any form. Including, but not limited to, the following:

• Credit granted in addition to any existing credit or credit limit

• Credit granted pursuant to an open-end credit plan

• Refinancing or other renewal of credit, including the issuance of a new credit card in place of an expiring credit card or in substitution for an existing credit card

• Consolidation of two or more obligations; or the continuance of existing credit without any special effort to collect at or after maturity

Judgmental System of Evaluating Applicants: Any system for evaluating the creditworthiness of an applicant other than an empirically derived, demonstrably and statistically sound scoring system.

Person: A natural person, corporation, governmental subdivision or agency, trust, estate, partnership, cooperative, or association.

Evaluation of Applications

Institutions have three options in evaluating credit applications:

• A demonstrably and statistically sound, empirically derived, credit scoring system

• A judgmental system

• A combination of credit scoring and judgmental

Neither judgmental nor credit scoring evaluation systems can discriminate among applicants using prohibited bases as variables in the credit evaluation process.

Demonstrably and Statistically Sound Credit Scoring System:

A demonstrably and statistically sound, empirically derived, credit scoring system is a system that has the capability of differentiating between creditworthy and non-creditworthy applicants with a statistically significant probably. Values of scores are assigned to credit applicants in direct proportion to the predictive values of variables employed in the scoring system. The requirement that a scoring system be demonstrably sound means that a clear relationship must be shown between the measure of creditworthiness and the set of predictive variables used in the scoring system. Initially financial institution may adopt a scoring system developed form a source not directly related to the institution’s own credit experience. However, once an institution has adopted a credit scoring system, it must be validated periodically. Validation is the process by which an institution demonstrates that the variables used in its scoring system are, or continue to be, predictive of the creditworthiness of applicants. Once sufficient credit experience under a scoring system has been gained, an institution must use the observed creditworthiness of its own customers to test whether the system is valid (that is, predictive at statistically significant levels). Anytime a validity test is performed and the set of scoring variables are found to be inappropriate (that is, non-proportional to their predictive value), the scoring system is longer demonstrably and statistically sound, empirically derived, and it is invalid.

Judgmental Credit Scoring System

A judgmental system is any system, other than a credit scoring system, used to evaluate creditworthiness. As a general rule, most financial institutions have guidelines for evaluating credit requests that are often based on the same predictive factors used in demonstrably and statistically sound credit scoring systems. However, the values used are not statistically valid. In this type of system loan officers judgmentally evaluate the applicants and then accept the credit request.

Combination of Statistically Sound and Judgmental System

Some institutions use a combination of the two systems to evaluate credit applicants. An application is scored using a demonstrably and statistically sound credit scoring system if the results are close to the accepted or rejected cutoff, the institution may use a judgmental override. Loan officers review the scored applications and judgmentally render the final credit decision.

Other General Requirements

The Equal Credit Opportunity Act and Regulation B further require creditors to:

• Notify applicants of action taken on their applications

• Report Credit history in the names of both spouses

• Retain records on credit applications

• Collect information about the applicant’s race or other personal characteristics in applications for certain dwelling-related loans

Dwelling in this instance means a residential structure containing one-to-four family units. Individual cooperative or condominium units, mobile or other manufactured homes are also included, regardless of whether they are considered as real property under state law.

Applicants also have the right under ECOA and Regulation B to receive copies of appraisal reports for credit that is secured by a dwelling. Creditors must provide the appraisal reports either routinely or upon request. This must be done whether the credit request is granted, denied or withdrawn. If the creditor provides the appraisal only upon written request, the applicant must be notified in writing of the right to receive a copy of the appraisal, and the notice may be given at any time during the application process but, not later than when the creditor provides notice of action taken in accordance with Section 202.9 of Regulation B.

ECOA prohibits discouragement of applications. Creditors may not use words, symbols, models or other forms of communication in advertising that express, imply or suggest a discriminatory preference. However, a creditor may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit.

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Advantage Financial Funding Corp. - The Commons at Lincoln Center - 124 John Robert Thomas Drive - Exton, PA 19341
Office Phone: (610) 594-8880 Fax: (610) 594-6884 Toll Free Phone: (800) 578-8400

Licensed and Regulated by:

 Pennsylvania Department of Banking    Pennsylvania Department of Insurance    Pennsylvania Real Estate Commission

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