EQUAL CREDIT OPPORTUNITY ACT:  

OVERVIEW AND UPDATE

I.  Overview:

The purpose of ECOA is to require companies engaged in the extension of credit to "make credit equally available to all creditworthy customers." ECOA makes it unlawful "for any creditor to discriminate against any applicant as to any aspect of the credit transaction (1) on the basis of race, color, religion, national origin, sex, marital status, or age (provided the applicant is of legal age and capacity to contract; (2) because all or part of the applicant's income derives from any public assistance program; or (3) because the applicant has in good faith exercised any right under the Consumer Credit Protection Act.  ECOA also requires creditors to notify applicants of action taken on their applications; to report credit history in the names of both spouses on an account; to retain records of credit applications; to collect information about the applicant's race in certain real estate loans; and to provide applicants with certain reports and appraisals in connection with a credit transaction for a first lien on a dwelling.

ECOA covers creditor activities before, during and after the extension of credit. A creditor may not discriminate in any aspect of the credit transaction and a creditor may not make any oral or written statement, in advertising or otherwise, that would discourage an applicant or prospective applicant based upon one of the prohibited basis which would cause a reasonable applicant from pursuing an application.  Liability arises under two main theories: disparate treatment and disparate impact. Disparate treatment occurs when a creditor treats an applicant differently based on one of the above factors. Disparate impact occurs when a creditor does not intentionally discriminate but employs facially neutral policies or practices that have an adverse effect or impact on a member of a protected class unless it meets a legitimate business purpose that cannot be reasonably achieved by means that are less discriminatory.  So even if you do not intentionally discriminate, due to disparate impact and the manner in which the term "creditor" and other terms are defined allow for broad implications for our industry.

II.  Am I a "Creditor Subject to ECOA?"

As you will see, the term "creditor" is defined very broadly. ECOA applies to all persons who, in the ordinary course of business, regularly participate in the credit decision, including setting the terms thereof. The term "creditor" includes a creditor's assignee, transferee, or subrogee who so participates. For purposes of discrimination under 202.4(a)[1] and encouragement[2] under 202.4 (b), the term creditor 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 may be made. A person is not a creditor regarding any violation of ECOA 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 broad reach of the term "creditor" likely includes brokers, funders, and originators in certain circumstances. Further, a broker, funder or originator could be liable for the acts of third parties with whom they have business connections if they have knowledge that such parties are violating ECOA in accordance with the above definition of creditor. 

On the other hand, ECOA protects all "applicants" which includes all natural persons, corporations, limited liability companies, trusts, estates, partnerships or other entities. On a side note, generally guarantors are not considered "applicants" under ECOA which would trigger certain requirements under ECOA. However, the CFPB has yet to officially adopt this majority position which originally came from Seventh Circuit and adopted in many jurisdictions.   

III.  Business Credit versus Consumer Credit- Is There a Distinction?

The not-so-simple answer is yes and no. ECOA does differentiate between "consumer" and "business" credit. However, as you will see below, certain business credit is treated differently depending on the size of the applicant's gross revenue from the prior fiscal year.

Consumer credit is defined as credit extended to a natural person primarily for personal, family, or household purposes. � 202.2 (h). Business credit refers to extensions of credit primarily for business or commercial (including agricultural) purposes, but excludes extensions of credit for public utilities, certain securities, certain incidental activities and government credit. See 202.3(a)-(d).   

The trouble arises when you have a business credit applicant that has gross revenues from the prior fiscal year of $1,000,000.00 or less. The requirements then almost mirror the consumer credit requirements for notifications.  As you will see below, ECOA does provide some benefit to the business creditor in these situations. Please be aware that the distinction between consumer and business credit does not affect the general non-discriminatory aims of ECOA and a business creditor can still be liable for discrimination or encouragement under ECOA, regardless of the nature of the credit. The only distinction and benefit provided to a business credit transaction relates to the less stringent standards of record keeping and notifications.  

IV.   Notifications

ECOA requires all business creditors to provide notifications to applicants that the creditors comply with ECOA.  Many in our industry comply with this provision by providing language on the application stating that ECOA prohibits creditors from discriminating against applicants on the basis of race color, religion, national origin, sex, marital status, age (provided the applicant is of legal age and capacity to enter in a binding contract); because all or part of the applicant's income derives from public assistance; or because the applicant has, in good faith, exercised any right under the Consumer Credit Protection Act. Such a notice must also provide the name and address of the federal agency that regulates the creditor. The identity of the regulator will depend on the jurisdiction and type of entity. Creditors are also required to provide notices of adverse action to applicants. The requirements depend on the business credit applicant's gross revenue from the prior fiscal year.

a. Requirements for When Dealing  with Businesses with $1,000,000.00 or less in the Prior Fiscal Year

In this situation, the requirements mirror the consumer standard, with a few exceptions allowing for oral disclosures. A creditor in this situation may tell the applicant orally or in writing of the action taken within 30 days of receiving a complete application. If adverse action is taken, within 30 days, the creditor must provide a statement about the action taken that either includes a statement of specific reasons for the action taken or a disclosure of the applicant's right to a statement of the reasons for an adverse action. This disclosure of the applicant's right to a statement in a business credit situation may be disclosed either at the time of the adverse action or at the time of the application, so long as the disclosure is in a form the applicant may retain and satisfies ECOA notice requirements. Further, if the application was made entirely over the phone the creditor may provide an oral statement of action taken and of the applicant's right to a statement for a reason for adverse action.  Many in our industry satisfy ECOA requirements by including language on the application which says generally if the applicant is denied credit; the applicant has the right to a written statement of the specific reasons for the denial while providing the contact information where such information can be obtained.

Generally, a creditor must notify an applicant of action taken, whether favorable or adverse, within 30 days of a complete application.  A creditor may not need to comply with the 30 day notification rule if (i) the creditor makes a counteroffer thus extending the time period to 90 days, unless the applicant uses the credit during that time; or (ii) if the application was incomplete and the creditor sent a notice of incompleteness requesting additional information, designating a reasonable time period for the applicant to provide and the applicant so fails do so during that time period.  A creditor may also provide an adverse action notice upon an incomplete application as well.

b. Requirements for When Dealing with Businesses with More than $1,000,000.00 in the Prior Fiscal Year

Requirements under ECOA for business credit applicants with gross revenues that exceed $1,000,000.00 in the previous fiscal year are rather simple. The creditor must notify the applicant of the action taken within a reasonable time period. The notice may be oral or written and a written statement of the reasons for adverse action and ECOA notice need only be provided if the applicant makes a written request within 60 days of the creditor's notification of the action taken.

c.  Applications Submitted Though a Third Party

As is often the case in our industry, the interplay of a funder, broker and originator in the credit transaction process could possibly lead to all parties involved as being defined as a "creditor." When this is the case, the notification of adverse action may be given by one of the creditors to whom an application was submitted or by a non-creditor third party.  If the applicant is provided only one notification on behalf of multiple creditors, the notice must contain the name and address of each creditor and either disclose the applicant's right to a statement of specific reasons within 30 days or give the primary reasons each creditor relied upon in taking the adverse action indicating the reason for each creditor.  However, the notice need only name one regulatory agency, in the event the creditors are under the jurisdiction of multiple agencies. There is no need to name all creditors enforcement agencies. 

ECOA also provides a "safe harbor" for creditors when using a third party to provide such notices. A creditor is not liable for an act or omission of the third party that is a violation of ECOA if the creditor accurately and in a timely manner provided the third party with the information necessary for the notification and maintains reasonable procedures aimed at preventing such violations.

d.  Electronic Disclosure

As is common in today's marketplace, any disclosures required to be given in writing by ECOA may done in electronic form so long as they comply with the provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) found at 15 U.S.C. 7001.

A review of your ECOA notices and policies may be worth your time and effort. The penalties for non-compliance can be harsh and we are often not aware of the consequences. Punitive damages may be awarded up to $10,000 in individual actions and up to 1% of your net worth in class actions, as well as attorney's fees and courts costs. So please be aware of the implications of your actions and adequately document and retain all records when a possible ECOA violation or angry applicant presents itself. Check your forms for the required disclosures, including the optional language to satisfy ECOA requirement with regards to the applicant's right to a statement as well as the inclusion of the applicable federal agency on your disclosures and forms. Also, analyze your internal procedures to ensure that proper systems are in place to address these problems in the event they arise. As always, please feel free to contact us with any further or more detailed questions.  Also look for a future newsletter on the Fair Credit Reporting Act.

Discounting: Approaching the 

Bank's Federal Lending Limit

One of the most common questions we hear is "should the bank treat the lessor/originator or the lessee as its customer for regulatory purposes and concentration limits?" If the assignment is styled as a nonrecourse loan to the lessor, isn't the lessor to be considered the borrower? Does the nonrecourse nature of the transaction and the fact that the lessee's credit is the driving force matter? 

Generally, a bank's total outstanding loans to any borrower may not exceed 15% of the bank's total capital [1] and the nominal borrower on any financing would be treated as the borrower. There is a notable exception: 12 C.F.R. 32.3 (c) (10) provides an exemption from the lending limit for "loans" made to leasing companies. A loan to a leasing company will be deemed a loan to the lessee, and not to the leasing company, provided that (1) the bank evaluates the creditworthiness of the lessee before the loan is extended; (2) the loan is non-recourse to the leasing company; (3) the bank receives a security interest in the equipment and upon an event of default may proceed directly against the equipment and the lessee; (4) the leasing company assigns all of its rights to the bank; (5) the lessee's lease payments are assigned and paid to the bank; and (6) the lease terms are subject to the same limitations that would apply to a bank acting as lessor.  

All of the above conditions seem to be straightforward enough. Questions arise with regards to the payment and collection of the lessee's rental payments, stated in condition (5) as the lessee does not pay the bank directly. Can the leasing company still collect the payment and remit it to the bank and qualify for the exemption? Must the lessee pay the bank directly? Would a lockbox agreement suffice?  

In 1974, the Office of the Comptroller of the Currency (the "OCC") incorporated a longstanding exception to the federal lending limits known as the US Leasing exception. The OCC stated, "[T]he leasing company should be viewed merely as a nominal lessor and servicer of the lease acting on behalf of the lending bank." See Interpretative Letter 955, OCC, Author J. Sablich (January 31, 2003). "The rental payments are the primary source of repayment of the loan and this should be understood by all parties to the transaction." Id.  Be advised that in legal opinions issued by the OCC the US Leasing exception stated above is extremely narrow in its interpretation.  

The OCC has stated two methods to satisfy subsection 4 above with regards to the lessee's payments being paid to the bank.  

(i)   Lease payments collected by the leasing company that are forwarded to the lending bank within one (1) business day of receipt will satisfy the requirement that the lessee's rental payments are paid to the bank; or

(ii)  A lockbox agreement, such as where the lessee is directed to make all future payments to a lock box at the Bank where the Bank will have sole control over the lock box and any remaining funds may be distributed to the leasing company at then end of every month.  

The OCC interprets the exemption narrowly, so strict compliance with the safeguard provisions is recommended.  

The next logical question, do Equipment Finance Agreements ("EFA") receive similar treatment and qualify for the US Leasing exception? Without any clear rulings from the OCC, it is unlikely that a definitive answer can be provided. A good argument could be made that the purpose of an EFA is the same purpose that the US Leasing exception is based upon. However, in today's current regulatory environment it would be best to approach this question with caution and seek an OCC advisory opinion.

What about banks that are not OCC-regulated? We recently contacted the FDIC Atlanta field office attempting to obtain clarification on the FDIC's position as it relates to this issue. In speaking with FDIC counsel, we were informed that the FDIC would not issue an interpretive letter on this issue for two reasons. First, the FDIC does not like to issue interpretative letters based upon hypotheticals as compared to a live enforcement action. Second, the US Leasing exception as it relates to the calculation of the federal lending limits has not be a common or reoccurring theme in enforcement actions.  FDIC counsel opined that there has not been an enforcement action based upon the US Leasing exception out of the Atlanta field office in recent memory. It appears as if this is not a "hot button" issue for the FDIC currently but we expect banks to take the conservative route of following the OCC guidelines, and limiting the lessor's role in servicing.

This leaves open several questions that we are pondering: Is it better to structure the assignment as a "sale" of the rent stream only? This would seem to make sense for an EFA or dollar purchase option lease. Should the bank service the transaction only in terms of collecting rents? It seems that the key to the desired characterization is in the terms of the servicing. We welcome input from readers.

Traveling North:  

Vicarious Liability for Lessors in Canada

Lessors in our industry often do not inquire into the likelihood of a motor vehicle under lease entering Canada. Consequences of not doing so could impact your business. We know that some lessees move equipment across the border whether or not in violation of their lease. No special licenses or vehicle registration is required for a lessee to drive across the border. If your lessee enters Canada, Canadian law will govern. The main problem is that the Graves Amendment, which virtually abolished vicarious liability for lessors of motor vehicles in the United States, is left at the border. Vicarious liability in Canada continues to trouble lessors. This article will provide a general overview and hopefully bring to your attention the issues.

I.  Personal Injury

In the majority of the provinces [1], Canadian law provides a $1 million dollar cap on vicarious liability of lessor's of motor vehicles for personal injury. One would assume having the lessee obtain adequate insurance covering the lessor for $ 1 million dollars would be an adequate safeguard. Generally, this proposition is true.  Trouble arises in a minority of provinces where the cap is applied differently. These select provinces still hold the lessor on the hook for the $ 1 million dollar cap, irrespective of any recovery from the lessee. For example, on a personal injury claim of $2.6 million the injured party can still seek $1 million dollars from the lessor regardless of any recovery from the lessee. These parties are considered joint tortfeasors under Canadian law. See Stoszyn v. Mitsui Sumitomo, 2013 BSCS. It is also worth noting that the cap does not apply to lessor of certain motor vehicles. Generally, these vehicles include taxis, limousines, and buses.

II.  Personal Property Damage

Troubling as it may be, the majority of provinces in Canada do not provide for any cap on the vicarious liability of a lessor of a motor vehicle for property damage.  If there is any likelihood that your lessee could be entering Canada,  insurance in an increased amounts should be considered. These amounts should be much larger than typical policies on transactions solely in the United States. Insurance can reduce these risks but catastrophic events similar to the one mentioned above are difficult to overcome.

Our recommendation is to always due the proper level of due diligence on your lessee to inquire into the likelihood of the motor vehicle entering Canada. If it is possible, additional levels of insurance should be obtained as one trip across the border could be a major event. This general overview was intended to bring the issues to the forefront and if you have any further question regarding specific provinces or more detailed information under the law please contact us.

Trivia Challenge

NOTE: Most of these are quoted in only one of many versions, so consider the question WHO FAMOUSLY SAID SOMETHING LIKE:

1.  "Those who do not remember the past are condemned to repeat it."

3.  "I refuse to join any club that would have me as a member."

4.  (On his deathbed) "Either the wallpaper goes or I do."