Q&A: Here’s a question that a Wisconsin credit union recently asked The League’s Legal Affairs team, along with our answer. Do you have a compliance question? Contact The League’s Compliance Hotline at (800) 242-0833 or email.
Q. Some credit unions only serve members of certain ethnic or religious groups. How can their lending programs comply with the Equal Credit Opportunity Act (ECOA), which prohibits discrimination on the bases of race, color, religion, national origin, sex, marital status, age, etc.?
A. Credit unions tend to take it for granted that they do not have to lend outside their field of membership. But their ability to do so relies upon Reg. B protections given to “special purpose lending programs.”
Reg. B provides rules at 12 CFR §1002.8 for special purpose credit programs. Those rules permit field of membership requirements to apply to a credit union’s lending program. In fact, every credit union’s lending program is a special purpose lending program (even though the credit union may not realize it).
Historically, many Wisconsin credit unions started with closed charters serving limited fields of membership, such as:
- members of a Methodist, Catholic, or Baptist congregation.
- policyholders of a Lutheran insurance society,
- employees in what were once female dominated fields like teaching or nursing, or nearly all-male workforces, such as firefighters, foundry workers, police, brewery workers, and truck drivers.
On its face, such loan programs seem to violate Reg. B. In fact, a for-profit bank would not normally be permitted to use such limitations.
But the ECOA and Reg. B, at 12 CFR §1002.8(a)(2), permit extending special purpose credit to applicants who meet eligibility requirements under a credit assistance program offered by certain not-for-profit organizations for the benefit of their members. That particular provision applies to credit unions. It does not require that the group being served be disadvantaged.
That particular type of special purpose credit program must comply with the requirements of the ECOA and Reg. B, except:
- All program participants (i.e., borrowers) 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 or Reg. B.
- A creditor may obtain information that is otherwise restricted (for example, race, national origin, or sex) to determine eligibility for a special purpose credit program.
- A refusal to grant credit to an applicant is not a violation of the ECOA or Reg. B if the applicant does not meet the eligibility requirements under the special purpose credit program.
You rely on the same provision even if your credit union field of membership is not limited to one religion, gender, or nationality. That’s important because Reg. B also prohibits lending practices that have a discriminatory effect on a prohibited basis – even if unintentional. Most credit unions today have memberships based on geographic boundaries, employment, or education. Lending within those bounds will typically result in borrower demographics that may vary from the wider community. This could lead to claims that the credit union field of membership results in credit discrimination on a prohibited basis. But the protections given to a special needs credit program allow the credit union to focus on meeting the needs of its membership without violating Reg. B.
Other types of special purpose credit programs are permitted
Reg. B permits some other types of special purpose credit programs in addition to the umbrella program for a credit union serving its membership. For example, a credit union could also offer a program designed for the benefit of an economically disadvantaged class of persons offering special underwriting or pricing. Or it may take part in a credit assistance program expressly authorized by Federal or state law for the benefit of an economically disadvantaged class of persons.
No approval needed
The CFPB does not determine whether individual programs qualify for special purpose credit status. The credit union does not “apply” for approval of the special purpose program that is based on its field of membership.
Preemption of state law
Wisconsin has adopted several of its own laws that bar discrimination in lending. Those laws do not have exceptions for special purpose lending programs. Fortunately, Reg. B preempts state laws to the extent that they are inconsistent with Reg. B. The regulation says, at 12 CFR §1002.11(b):
Preempted provisions of state law.
(1) A state law is deemed to be inconsistent with the requirements of the Act and this part and less protective of an applicant within the meaning of section 705(f) of the Act to the extent that the law:
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(v) Prohibits inquiries necessary to establish or administer a special purpose credit program.