Special Loan and Deposit Program for Members of Non-Profit Organization

Question.

Bank is interested in working with a non-profit organization to offer its members a special program of higher interest rates on a deposit product and/or lower interest rates on a lending product. Would there be any compliance issues concerning this?

Response Summary.

The ECOA and Regulation B would not prohibit a loan program intended to benefit members or employees of a non-profit organization, but the Bank must consider whether the basis for membership in the organization would be prohibited, if it was the basis for a credit decision. Likewise, Federal and New Jersey laws do not prohibit a deposit program intended to benefit the same class, but the Bank should be aware that Federal examiners will scrutinize any overt discrimination against groups protected under other laws or regulations and may find such practices to be violations of UDAAP requirements.

The implementation of such a program must not be done in an arbitrary fashion, but pursuant to established criteria for such actions and with adequate compliance controls. This will go a long way towards persuading examiners of the validity of a policy if it demonstrates cognizance of legal and regulatory requirements and a genuine attempt to meet them.

ANALYSIS.

Loan Program

There is nothing in the Equal Credit Opportunity Act (“ECOA”) or Regulation B, which implements the law, that would prohibit making loans at a special rate of interest to members or employees of a non-profit organization, but the Bank should be concerned that such a program does not have the effect of violating the general rule against discrimination on a prohibited basis.

The question under ECOA is not whether there is discrimination, but whether it was done on a prohibited basis.

A “prohibited basis” means race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to enter into a binding contract), the fact that all or part of the applicant’s income derives from any public assistance program; or the fact that the applicant has in good faith exercise any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Bureau of Consumer Financial Protection (“CFPB”). 12 CFR §1002.2(z).

To discriminate against an applicant means to treat one applicant less favorably than another applicant. 12 CFR 1002.2(n). The general rule covers all dealings without exception between an applicant and a creditor, including the terms of the credit. Whether or not prohibited elsewhere by the regulation, a credit practice that treats applicants differently on a prohibited basis violates the law because it violates the general rule. Official Interpretations, ¶1002.4(a)-1.

In enforcing this prohibition, federal regulators have always looked not merely to overt discrimination, but to any act or practice which has a disparate effect on protected groups.

The question for the Bank in this matter is whether making loans at a more favorable rate to members or employees of a non-profit organization has the effect of treating applicants differently on a prohibited basis. If membership, for example, is based on race or gender, a loan to a member of the group would be made on the same basis as membership in the group. While a group may be allowed to discriminate in its membership, the Bank would not be, in making loans.

Does this mean, then, that such a loan program is prohibited by the ECOA? Not at all. What it does mean is that the Bank should consider the basis for membership in or employment by the organization and whether it would be prohibited by the ECOA, if a loan were made on the same basis. In creating the written program, the Bank should indicate the basis of such membership or employment and whether or not it would be a prohibited basis for making a credit decision.

In the event membership in or employment by the non-profit organization is on a basis that would be prohibited by the ECOA for loans, Regulation B does provide an exception for loan programs to extend credit to a class of persons who, under the Bank’s customary standards of creditworthiness, probably would not receive such credit.

A special purpose credit program is not allowed to discriminate against an applicant on a prohibited basis, but all program applicants may be required to share one or more common characteristics—for example, race, national origin, or sex—so long as the program was not established and is not administered with the purpose of evading the requirements of the ECOA The written program must contain information that supports the need for it. For example, a bank could review HMDA data along with demographic data for its assessment area and conclude that there is a need for special purpose credit program from low-income minority borrowers. The program should indicate the time period in which it will last or when it will be re-evaluated to determine whether there is a continuing need for it. 12 CFR §1002.8, Official Interpretations, ¶1002.8(a)-5, 6.

Deposit Program

There are no Federal or New Jersey laws which forbid discrimination on a prohibited basis with regards deposit accounts. The Federal Truth-in-Savings Act, Regulation DD, Title 17 of the New Jersey Statutes (Corporations and Institutions for Finance and Insurance), and the New Jersey Law Against Discrimination are all silent on the question. On the face of it, a special program could be instituted for a higher rate for deposit products offered to members or employees of a non-profit organization without the same concerns the Bank would have with regards a loan program. Nevertheless, the better policy for the Bank is to avoid such discrimination for deposits as it would for lending.

The Bank should want to protect its reputation in the community for fair dealing with regards all of its services. Moreover, the Bank should expect that Federal examiners will scrutinize any aspect of Bank services or operations which are being carried on in a discriminatory fashion. While there are no laws which explicitly forbid discrimination with regards deposits, the examiners may find such discrimination to be a violation of the requirements of the Unfair, Deceptive, or Abusive Acts or Practices (“UDAAP”) provisions of the Dodd-Frank Act.

UDAAP allows Federal examiners to determine whether an act or practice is “unfair,” it that it causes or is likely to cause substantial injury to consumers, the injury is not reasonably avoidable by the consumers, and the injury is not outweighed by any benefits to consumers. “Substantial injury” may be found if there are many relatively slight injuries. While deposit-related violations thus far have involved fees and charges, the application of UDAAP could go well beyond that.

A special deposit program is no more prohibited under UDAAP than a special loan program is under ECOA. The Bank, however, should consider whether offering deposits at a higher rate of interest to members or employees of a non-profit organization amounts to discrimination on the basis of race, color, religion, national origin, sex, marital status, or age, in the same way it would for the loan program.

Other Considerations

In the event the Bank determines that a special loan or deposit program for members or employees of a non-profit organization does not discriminate on the basis of race, color, religion, national origin, sex, marital status, or age, it should consider how the program will be administered. For example, must the applicant affirmatively apply for the benefits of the program? If an applicant is a member or employee, but does not seek the benefits of the program, will the Bank identify the applicant as a beneficiary and consider the application on that basis? How will knowledge of the program be brought to the attention of its beneficiaries.

The implementation of such a program must not be done in an arbitrary fashion, but pursuant to established criteria for such actions and with adequate compliance controls. This will go a long way towards persuading examiners of the validity of a policy if it demonstrates cognizance of legal and regulatory requirements and a genuine attempt to meet them.

This entry was posted on Friday, June 20th, 2014 at 8:39 pm.