Equal Credit Opportunity Act (ECOA) Update

The Federal Reserve Board (FRB), has finally published its new rules amending Regulation B of the ECOA. These new rules are consistent with the FRB's policy of periodically reviewing and updating its regulations. While these new regulations became effective on April 15, 2003, the mandatory compliance date was April 15, 2004. Among the specific provisions of the ECOA of immediate interest to unsecured business credit grantors are: the treatment for noticing
of adverse actions, timeliness of noticing, record retention requirements, and signature of spouses or other persons.

The ECOA makes it unlawful for a creditor to discriminate against an applicant in any aspect of a credit transaction on the basis of an applicant's national origin, marital status, religion, sex, color, race, age, receipt of public assistance benefits, or the good faith exercise of a right under the Consumer Credit Protection Act. Technically, the ECOA is implemented by the FRB's Regulation B. In August of 1999, the FRB issued proposed rules for the ECOA that covered all elements of the Act from definitions of a "credit application" to the definition of a "creditor" to consideration of the term "adverse action." In all, the FRB received over 750 comments on the proposed new rules—a response that delayed publication and implementation of the new rules until 2003 and 2004.

Discussion and Summary of Relevant Revisions to Regulation B
Adverse Action (Section 202.2 (c)) "Under the new regulations, adverse action is defined as a refusal to grant credit in substantially the amount, or on substantially the terms requested in an application, unless the creditor makes a counteroffer (to grant credit in a different amount or on other terms) and the applicant uses or expressly accepts the credit offered. It also means a termination of an account or an unfavorable change in the terms of an account that does not affect all, or substantially all, of a class of the creditor's accounts. It could also include a refusal to increase the amount of credit available to an applicant who has made an application for an increase.

It does not mean a change in the terms of an account expressly agreed to by an applicant, nor does it include any action relating to an account taken in connection with inactivity, default, or delinquency.

Business Credit (Section 202.2 (g))
"The FRB has essentially retained the existing consideration of business credit as an extension of credit primarily for business or commercial (including agricultural) purposes. The recommendation that NACM made to the FRB was that the definition of "incidental credit" should be expanded to include "incidental business credit." However, many commenters to the FRB opposed this proposal out of concern about possible discrimination against minority-owned businesses. Consequently, the FRB decided that incidental credit would not be expanded to include business credit but would refer only to consumer credit that is extended by a local merchant who does not normally extend credit, for example, to a long-standing customer; or by a doctor or lawyer as an accommodation to a patient or client.

Signature of Spouse or Other Person (Section 202.7)
In general, a creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit. However, if a married applicant requests unsecured credit and resides in a community property state, or if the applicant is relying on property located in such a state, a creditor may require the signature of the spouse on any instrument necessary, or reasonably believed by the creditor to be necessary under applicable state law, to make the community property available to satisfy the debt in the event of default.

The FRB failed to include the NACM request that Regulation B be clarified to add tenancy by the entireties states to the provisions of the Act in order to eliminate inconsistent treatment.

Notification of Action Taken (Section 202.9)
The FRB considered additional requirements for noticing and record-keeping for business credit grantors. However, the FRB was persuaded that additional provisions of the ECOA to business creditors would not contribute substantially to effectuating the purposes of the Act.

With regard to a business that had gross revenues of $1 million or less in its preceding fiscal year, (other than an extension of trade credit, credit incident to a factoring agreement, or other similar types of business credit), a creditor must respond to an application within 30 days of receiving a completed credit application.

The business creditor may provide a statement of the action taken either orally or in writing, when adverse action is taken. In addition, the creditor is required to disclose that the applicant has a right to a statement of reasons pertaining to the credit decision. However, this disclosure may be given at the time of the application, instead of when adverse action is taken, provided the disclosure contains the information required by Regulation B. (This includes the disclosure of the name and contact information of the individual from which the statement of reasons can be obtained and the fact that the applicant can have the statement of reasons provided in writing within 30 days of a written request from the applicant. Additional information required includes the general ECOA prohibitions against discriminatory credit granting practices and the identification of the Federal agency that administers the compliance review of this activity.)

For an application made entirely by telephone, a creditor satisfies the requirements of Regulation B by an oral statement of the action taken, and the applicant's right to a statement of reasons for adverse action.

With regard to a business that had gross revenues in excess of $1 million in its preceding fiscal year or an extension of trade credit, credit incident to a factoring agreement, or other similar types of business credit, a creditor can notify the applicant either orally or in writing of the action taken. The creditor must provide a written statement of the reasons for adverse action and the ECOA notices specified in Regulation B, if the applicant makes a written request for the reasons within 60 days of the creditor's notification.

Statements for reasons of adverse action must be specific and indicate the principal reasons for the adverse action. Statements that the adverse action are based on the creditor's internal standards or policies or that the applicant failed to achieve a qualifying score on the creditor's credit scoring system are deemed to be insufficient. However, the FRB has published several sample forms for adverse action notification that provide outlines as to the level of detail that must be disclosed under Regulation B.

Also under new guidelines, notification of actions taken may be transmitted by electronic means but they must meet minimum standards as outlined in Regulation B and the Electronic Signatures in Global and National Commerce Act (E-Sign Act [15 U.S.C. 7001]).

Record Retention (202.12)
The FRB has continued with a special rule for the retention of records for business credit applications. For a business that had gross revenues in excess of $1 million in its preceding fiscal year, or an extension of trade credit, credit incident to a factoring agreement, or other similar types of business credit, the creditor shall retain records for at least 60 days after notifying the applicant of the action taken. If within that 60 day period of time the applicant requests in writing the reasons for adverse action or that the records be retained, the creditor shall retain the records for 12 months. (Again, there is no definition of trade credit offered by the FRB in this final rule.)

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NACM Government Affairs Updates
April 2004

April 16, 2004

House Approves Six-Year Transportation Bill
by Veto-Proof Margin

The $275 billion House surface transportation bill known as the Transportation Equity Act: Legacy for Users (TEA LU) passed the House floor on April 2, 2004, by a vote of 357 to 65. The six-year TEA LU bill (H.R.3550) exceeds the White House limit on authorizations by $19 billion, although it is significantly less expensive than the Senate's $318 billion measure approved in February.

House and Senate conferees will meet after Congress' Spring recess to consider developing a final bill. Bush Administration officials maintain they will recommend a veto of any bill costing more than the President's $256 billion Safe Accountable Flexible and Efficient Transportation Equity Act (SAFETEA).

TEALU faced a number of amendments before its passage was complete, adopting 11 of them including a Floor Manager's amendment offered by bill author and House Transportation and Infrastructure Chair Don Young (AK). The Young amendment, passed by voice vote, made several changes to the bill including: altering the Revenue Aligned Budget Authority (RABA) trigger to base its adjustments on two year projections rather than one (as is provided in current law); the creation of a $125 million set aside from the Bridge program to fund seismic retrofit activities; the designation of a High Priority corridor running through Los Angeles, Orange, San Bernardino, and Riverside Counties (though funding totals remain unspecified); an increase in the number of member- requested High Priority projects; funding for a study on transit security and emergency preparedness in the 38 urbanized areas with populations of over 1 million people; and an increase in high speed rail development programs to $70 million per year from 2005 to 2012.

A series of other amendments were adopted for inclusion in the final bill. One by Rep. Mark Kennedy (MN) to permit highway tolls on new voluntary-use lanes until those lanes had raised enough toll-revenue to pay for themselves, was approved by a vote of 231 to 193. Another amendment giving single- occupancy hybrid vehicle drivers access to high occupancy vehicle lanes (HOV) without requiring states to charge tolls was offered by Rep. Adam Schiff (Burbank) and agreed to by voice vote.

TEALU maintains TEA-21's Minimum Guarantee (MG) formula, which required that each state receive back federal highway spending that totals a minimum of 90.5 percent of the gas and other road taxes attributable to the state. An amendment by Rep. Isakson (GA), which failed 170-254, sought to boost every state's MG funds by expanding the scope of the minimum guaranteed return of highway trust fund dollars to include high priority projects and the newly created projects of regional and national significance. (In the end, most California Members of Congress opposed the amendment.) A number of donor states such as California that pay more highway taxes than are received in federal highway funds had sought to increase the minimum return to 95 percent. The final House bill retains a "reopener provision," however, requiring Congress to revisit the issue of funding equity to states by the end of 2005 or risk a temporary stoppage of U.S. transportation spending.

TEA-21 expired on September 30, 2003, and stop gap measures have kept transportation programs in operation since then—the latest version is due to expire at the end of April 2004.