Loan Program to Employees of Company

Question/Issue

The Bank has been given an opportunity to go to a new business in the area and talk to its employees. It asks whether there are any fair lending issues raised if it wants to offer this group a discounted rate on a loan or a reduction in any loan fees, as part of a special promotion.

Response Summary

The ECOA and Regulation B would not prohibit a loan program intended to benefit employees of a business, but the Bank must consider whether the business’ hiring practices conform to the requirements of the equal employment laws and regulations, which complement those of the ECOA. Since employment in the business is part of the criteria for lending, discriminatory hiring practices would result in the Bank inadvertently discriminating on a prohibited basis. The implementation of such a program must not be done in an arbitrary fashion, but rather, pursuant to established criteria for such actions and with adequate compliance controls. This will help persuade examiners of the validity of a policy by demonstrating awareness of legal and regulatory requirements and a genuine attempt to meet them.

Response Detail

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 employees of a business, 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.

A “prohibited basis” under Regulation B 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 exercised 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 [12 CFR §1002.2(z)].

To discriminate against an applicant means to treat one applicant less favourably 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 which 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 at overt discrimination, but at any act or practice which has a disparate effect on protected groups.

The question for the Bank is whether making loans on more favourable terms to employees of a business has the effect of treating applicants differently on a prohibited basis.

Federal laws, such as the Civil Rights Act of 1964, Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967, and the Americans with Disabilities Act of 1990, prohibit employment discrimination involving:

• Unfair treatment because of race, color, religion, sex, national origin, age, disability, or genetic information
• Harassment by managers, co-workers, or others in the workplace because of race, color, religion, sex, national origin, age, disability, or genetic information
• Denial of a reasonable workplace accommodation because of religious beliefs  or disability
• Retaliation because of a complaint of job discrimination or assistance in a job discrimination complaint or law suit

The criteria of the equal employment laws complement those of the ECOA. If employment, for example, is based on race or gender, a loan to an employee of the business would be made on the same basis as employment by the business, and thus may be in violation of Regulation B.

Does this mean that such a loan program is prohibited by the ECOA? Not at all. What it does mean is that the Bank should perform a risk analysis, and consider the basis for employment by the business and whether it would be prohibited by the ECOA, if a loan were made on the same basis.

In the event that employment by the business 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 under Regulation B is not allowed to discriminate against an applicant on a prohibited basis, but it is permissible to require all program applicants 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 a 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].

In the event the Bank determines that a special loan program for employees of a business 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 an 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 would help persuade examiners as to the validity of a policy by demonstrating awareness of legal and regulatory requirements and a genuine attempt to meet them.

This entry was posted on Friday, December 26th, 2014 at 3:18 pm.