Understanding adverse actions under ECOA and Regulation B

Regardless of the industry you work in, or whether you’ve been in the credit field for decades or only a matter of months, it is vital that you know and understand the federal laws that regulate a credit managers’ activity. Credit managers across industries are beholden to the regulations set by the Equal Opportunity Credit Act (ECOA), which prohibits discrimination in the extension of credit. ECOA forbids discrimination on the basis of sex, race, religion, color, creed, national origin, age or marital status in the extension of credit.  

Why it matters: Credit managers deny credit every day, whether it is to a new customer who is not creditworthy or an established customer who wants its credit line raised despite its history of missed or late payments. Denying credit is simply part of many credit managers’ day-to-day work, but ECOA violations must not be part of that work.  

To understand ECOA guidelines you must first understand what constitutes an adverse action. “Simplistically, an adverse action occurs when a credit manager says ‘no’ to an application for the extension of credit,” said Wanda Borges, Esq., member at Borges & Associates, LLC (Syosset, NY).  “Typically, this adverse action occurs when credit is denied at the outset. It can also occur at any time during the business relationship if the customer requests an increase of its credit availability and is denied that increase.  It is also an adverse action if credit is granted but only in an amount lower than that for which it was sought.” 

An adverse action is not, in and of itself, an ECOA violation. In addition to denying a customer credit, denying credit on the terms a customer requested is also considered an adverse action, regardless of whether it is a new or established customer.  

For example, if a customer asks to change its terms from net 30 days to net 60 days, denying it these new terms is an adverse action. Denying alterations to terms is considered an adverse action, so proceed with as much caution that you would employ when denying credit entirely. If a credit manager does not accept the terms requested by a customer and the customer accepts the denial, it is no longer an adverse action.  

As credit managers, you cannot avoid adverse actions, but you must take the necessary steps to ensure that when denying credit, you are respecting the guidelines of the ECOA. When notifying customers that you are denying them credit or certain requested terms, you must give the ECOA notice as it is mandated in the statute.  

The notice reads: 

“The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant’s income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The Federal agency that administers compliance with this law concerning this creditor is Federal Trade Commission, Consumer Response Center, 600 Pennsylvania Avenue NW, Washington, DC 20580.” 

“Advise the applicant that if its request for an extension of credit is denied, it has the right to ask for the reasons why,” Borges said. “If the applicant asks for reasons for the denial, give the applicant legitimate reasons.” 

Regulation B provides a checklist of reasons which may be used in complying with the ECOA’s requirement to tell the customer why credit was denied. In the past, credit managers may have used only this checklist provided by the federal government and checked whichever options applied to that customer. Borges advises that the CFPB, in September, 2023 issued its guidance saying that “creditors cannot simply use CFPB sample adverse action forms and checklists if they do not reflect the actual reason for the denial of credit or a change of credit conditions.” Borges advises that credit managers provide the actual reasons for denying credit, whether they were unable to verify credit references, or the customer carries a history of late payments.  

While ECOA has no set time limit for when the notification must be sent, Borges recommends sending it within a reasonable amount of time, with 30 days being acceptable. “It is easy for a credit manager to get busy and forget about letting the applicant know that credit was denied,” Borges said. “That is probably the number one cause for a problem. So, credit managers must be sure to give the notification required by the ECOA whenever they turn down credit.” 

The Bottom Line: With credit and terms being denied frequently, understanding what an adverse action is and the steps that must be taken when one occurs is crucial for credit managers. Borges will lead a session on ECOA at this year’s Credit Congress in Cleveland. Those attending should check out “Rock and Roll Is Here to Stay: As Are the Statutes Creditors Need to Obey [A Discussion on the Equal Credit Opportunity Act, Regulation B, Sherman Antitrust & Robinson-Patman].”