CREDIT WHERE DUE
An Opportunity for Trouble
Don’t run afoul of the Equal Credit Opportunity Act. Violations can be costly and will add to your workload. BY C. ROBIN SZABO
I
f you find yourself in the position of denying credit to an applicant, it pays to make sure you are in compliance with the Equal Credit Opportunity Act (ECOA). It prohibits discrimination in any aspect of a credit transaction. And it applies to any extension of credit, including those given to small businesses, corporations, partnerships and trusts. The act makes clear that credit applicants have the right to obtain a written statement of reasons for a denial of credit, and it requires creditors to keep certain records on credit applications. The act is implemented by the Federal Reserve Board’s Regulation B. Violators can be sued in court for actual damages. Punitive fines run up to $10,000 for individual lawsuits and up to the lesser of $500,000 or 1% of the creditor’s net worth for class-action lawsuits. Media companies who supply services to their customers on credit terms must comply with the notification, specific-reasons requests and record-retention requirements of the act.
NOTIFICATION
You must inform your applicant of your decision regarding extension of credit, orally or in writing, within a reasonable time. Thirty days is considered to be an acceptable time frame for compliance. Here’s a sample letter that can be used as a template when informing applicants of an adverse action or denial: Thank you for your interest in advertising with us. However, based on the information we have received, we are unable to grant your request for an open account at this time. If you would like the specific reasons why your application for credit was denied, please contact me at the address shown below within 60 days of this communication. We will provide you the reasons credit was denied
within 30 days of receiving your request. Until additional information is received, we will be happy to allow you to advertise with us on a cash in advance basis.
The ECOA notice must be substantially similar to the following: “The federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, SPECIFIC REASONS REQUESTS color, religion, national origin, sex, marital If the applicant makes a written request for status, age (provided the applicant has the the reasons within 60 days of being notified capacity to enter into a binding contract); of the adverse action, you must provide a because all or part of the applicant’s income written statement making clear why they were derives from any public assistance program; denied credit and include the ECOA notice. or because the applicant has in good faith The statement of reasons must be specific exercised any right under the Consumer Credit Protection Act. The federal agency that administers Punitive damages run up compliance with this law conto $10,000 for individual cerning this creditor is the Federal lawsuits and up to the lesser Trade Commission, Equal Credit of $500,000 or 1% of the Opportunity, Washington, DC creditor’s net worth for 20580.” class-action lawsuits. RECORD RETENTION
and must indicate the principal reason or reasons for the adverse action. It is insufficient to merely explain, for example, that the action was based on the creditor’s internal standards or policies, or that the applicant failed to achieve the qualifying score on the creditor’s credit scoring system. Acceptable reasons include: insufficient number of credit references; unacceptable type of credit references provided; unable to verify credit references; insufficient length of time in business; insufficient income for amount of credit requested; excessive obligations in relation to income; unable to verify revenues; no credit file; limited credit experience; poor credit performance with us; delinquent past or present credit obligations with others; garnishment, attachment, foreclosure, repossession, collection action or judgment.
8 The Financial Manager • November/December 2019
You must retain records for at least 60 days after notifying the applicant of the action taken. If within that time period the applicant requests in writing the reasons for adverse action or that records be retained, you must keep the records on file for 12 months. You must retain the information beyond 12 months if you receive actual notice that you are under investigation or are subject to an enforcement proceeding for an alleged violation by the U.S. Attorney General or by an enforcement agency charged with monitoring compliance. In this case, you must retain the information until final disposition of the matter, unless the agency or court allows disposal at an earlier time. C. Robin Szabo is president of Szabo Associates, media collection professionals, in Atlanta, GA. He can be contacted at robin@szabo.com or (404) 266-2464.
