Determining a customer’s creditworthiness is a key responsibility for credit professionals, but the process is complicated by the legal obligations of the Equal Credit Opportunity Act (ECOA) and Regulation B.
Why it matters: It’s important to understand your legal obligations and what you don’t have to say when denying credit. By maintaining transparency and professionalism in credit denial communications, you can avoid legal implications and uphold ethical standards in credit management practices.
It’s illegal to deny credit for discriminatory reasons. If you do, you run the risk of violating the Equal Credit Opportunity Act (ECOA) and Regulation B, which prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status and age. These violations could result in possible litigation.
What they’re saying: “It is most important that a creditor adheres to the notification requirements as well as the requirement to provide a clear explanation of reasons for denying credit,” said Wanda Borges, Esq., member at Borges & Associates, LLC (Syosset, NY).
If credit is denied, the applicant must be informed of the denial and informed that they have the right to know the reason for the denial of credit. If the reasons are requested, the creditor must provide an ‘adverse action notice’ explaining their reasons for the decision, which must be specific and related to the factors considered in the credit evaluation.
Here’s how a creditor can inform an applicant of their rights: “If your application for business credit is denied, you have the right to a written statement of the specific reasons for the denial. To obtain the statement, please contact {name, address and telephone number of the person or office from which the statement of reasons can be obtained} within 60 days from the date you are notified of our decision. We will send you a written statement of reasons for the denial within 30 days of receiving your request for the statement.”
Commercial creditors must be specific in their explanation of the reason for the denial. “It’s important to keep the details to a minimum and balance being specific and broad in your reasons,” said JoAnn Malz, CCE, ICCE, director of credit, collections and billing at The Imagine Group LLC (Shakopee, MN).
For example, if a credit score is used, that must be explained. And, if a consumer credit report is used, that must be disclosed. “You could also say, ‘we didn’t have sufficient information to make a risk assessment’ or ‘there was a lack of information that was requested but not provided,’” Malz said. “So, think through categorizing or itemizing the potential reasons for an adverse action.”
Here are some examples of what not to say when denying credit:
- “We cannot extend credit because of the industry sector of your business.”
- “The credit application was denied because industry contacts indicated your company has a history of fraud.”
- “The credit application was denied because the business is located in a high-risk area.”
To avoid possible violations or conflicts, include language from the ECOA and Regulation B in the header of the credit application. It is also helpful to seek legal counsel to make sure you’re adhering to regulations. “If we have an adverse action template, which we do, they have reviewed it and provided feedback and language that we would incorporate into the notice,” Malz said. “The Federal Trade Commission (FTC) offers a free manual that credit professionals can access on how to write an appropriate adverse action notice.”
Credit professionals, no matter their industry, must ensure that their credit approval practices are aligned with the ECOA and Regulation B, paying close attention to avoid any discrimination.
ECOA and Regulation B Amendments
As of 2021, ECOA and Regulation B encompass sexual orientation and gender identity discrimination, including discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes and discrimination based on an applicant’s associations.
The recently signed Senate Bill 1286, titled the Rosenthal Fair Debt Collection Practices Act: Covered Debt: Commercial Debts (RFDCPA), extends consumer debt collection protections to small businesses in California. This means that B2B credit managers and third-party collectors must adhere to stricter rules, potentially leading to challenges for commercial credit and increased costs for businesses.
The big picture: “It is important to stay informed, especially if you don’t deal with certain elements of credit collection law on a daily basis,” Malz said. “I suggest credit professionals do an annual reference on the ECOA and review their own contract language and clauses to see if anything needs to be updated.”
What’s next: Learn more about ECOA at the 2025 Credit Congress & Expo in Cleveland at the session, Rock and Roll Is Here to Stay and So Are the Statutes Creditors Need to Obey. Register here for NACM’s 129th Credit Congress in May!
