Counteroffer Does Not Require Written Notification

...Under the Equal Credit Opportunity Act, Court Rules

You receive an email from a new customer requesting $50,000 of goods, with payment in 30 days. After your credit analysis, you agree to a sale of $25,000, with 15 day credit terms. The customer accepts your counteroffer. The Equal Credit Opportunity Act (ECOA) requires that a credit professional which takes "adverse action" (Adverse Action) on a credit application to give written notification to the applicant explaining the credit denial. However, ECOA does not define Adverse Action. Given this, do all refusals of credit as requested by the applicant constitute Adverse Action requiring written notice? In today's commercial credit environment where the credit professional works with the sales department to make the sale, if the applicant accepts a counter offer for credit from the vendor, does this constitute an Adverse Action that requires written notification? The District Court for the Eastern District of Virginia recently concluded that not all actions taken by a creditor are Adverse Actions that require written notice of the reasons for the denial of credit; a counteroffer by the creditor and acceptance is one example of an action that does not constitute an Adverse Action.

What Is ECOA?
ECOA was enacted by Congress in 1989, and the Federal Reserve Board issued Regulation B to implement ECOA in 1990. ECOA is a federal statute that prohibits credit grantors from discriminating in the granting of credit based on a prohibited basis, including race, color, religion, national origin, gender, marital status or age (collectively referred to under the regulations governing ECOA as the "Prohibited Basis").

As ECOA is a federal statute, it applies to all states. ECOA is intended to promote the availability of credit without regard to characteristics that have nothing to do with creditworthiness. Creditors are required to notify applicants of action taken on their applications, and to retain records of credit applications.

ECOA's prohibitions against discrimination are aimed primarily at the evaluation of a credit application by a credit grantor. The general rule is that a credit grantor can consider any information it obtains in evaluating whether to extend credit so long as the information is not used to discriminate against an applicant on a prohibited basis.

Court Rules That A Counteroffer Does Not
Require Written Notification

The facts supporting the District Court's opinion is that the applicant requested credit. The creditor counter offered. The applicant accepted, but was not provided written notice of the reasons for being denied originally. The applicant sued the creditor. The court ruled that a creditor's denial of a credit application that is coupled with a counteroffer that the applicant accepts does not constitute an Adverse Action that requires a written notice and explanation. The court analyzed the ECOA statute, claiming that Adverse Action is a broad term, but then turns to the Regulations to determine that "adverse" is narrower and excluded are denials of credit that are coupled with counteroffers and accepted. The court noted:

"Notice is an integral part of the ECOA scheme to prevent discrimination 'with respect to any aspect of a credit transaction'. . . ECOA and the implementing regulations mandate that a creditor 'notify the applicant of its action on the application,' within thirty days after receiving a completed credit application, and provide that '[e]ach applicant against whom adverse action is taken' is entitled to written notification . . . ECOA's written notice requirement is triggered only in the event a creditor takes 'adverse action' with respect to an application for credit. This follows from the fact that ECOA's plain language reqires notice for 'adverse actions,' but is otherwise silent as to other (continued on page 7) types of action namely, 'approval[s] of [and] counteroffer[s] to applications for credit'. . . It is clear, therefore, that the regulations exclude from the definition of 'adverse action' any credit denials that are coupled with 'counteroffers' or a 'grant [of] credit in a different amount or on other terms' and, by logical extension, such denials coupled with counter offers are also excluded from ECOA's written notice requirements."

Had the applicant rejected the creditor's counteroffer, the creditor would have had to give written notice under ECOA.

Adverse Action Requires Written Notification

Absent an accepted counteroffer, ECOA requires credit grantors provide written notification to applicants as follows.

Notice of Adverse Action Within 30 Days

Under ECOA, a credit grantor must provide written notification to the applicant of Adverse Action within 30 days after a completed application is received by the credit grantor. The notification must provide that the applicant has the right to request reasons for the Adverse Action in writing within 60 days of such action. See Attachment A. Notification may be done verbally if the application was verbally made, otherwise it must be done in writing. ECOA provides that the notice of Adverse Action must contain language advising of ECOA similar to that in Attachment A.

Credit Applicant's Request For Statement Of Reasons Within 60 Days

The applicant has 60 days from receipt of the credit grantor's Adverse Action letter to request an explanation of adverse ruling.

Credit Grantor's Statement Of Reasons Within 30 Days

If an applicant requests an explanation of Adverse Action within 60 days, the credit grantor is to provide a statement of reasons within 30 days. The credit executive is not required to provide specific reasons for the Adverse Action, but instead may provide language such as, "adverse credit history"; "lack of business experience"; "lack of working capital"; or "too much secured debt." One form of letter addressing the statement of reasons letter is provided as Attachment B.

Conclusion

The court held that a rejection of the application for credit coupled with a counteroffer which the applicant accepts does not constitute an Adverse Action, and, thus, the creditor does not have to give notice to the applicant under ECOA.

ATTACHMENTS "A" - "B"

NOTIFICATION OF ADVERSE ACTION

[Date]

[Name of Business
Address
City, State & Zip Code]

Thank you for applying to us for unsecured credit. We cannot extend credit at this time.

If you would like a statement of reasons why credit was denied, please contact [credit executive], within 60 days of the date of this letter, at the following address. We will provide a statement of reasons within 30 days after receiving your request.

[Company Name and Address]

The Equal Credit Opportunity Act (ECOA) prohibits a credit grantor from discriminating against a credit applicant on the basis of race, color, religion, national origin, sex, marital status or age. The Federal Trade Commission administers compliance with ECOA.

Very Truly Yours,

[Credit Executive]

ATTACHMENT "A"

STATEMENT OF REASONS

[Date]

[Name of Business
Address
City, State & Zip Code]

In response to your letter requesting a statement of reasons why your request for credit was denied, we find that your [adverse credit history][lack of business experience][lack of working capital][excessive secured debt] prevents us from extending credit at this time. The Equal Credit Opportunity Act (ECOA) prohibits a credit grantor from discriminating against a credit applicant on the basis of race, color, religion, national origin, sex, marital status or age. The Federal Trade Commission administers compliance with ECOA.

Very Truly Yours,

[Credit Executive]

ATTACHMENT "B"

Reprinted by permission from Trade Vendor Quarterly Blakeley & Blakeley LLP
Summer 01