Compliance Blog

A (Mostly) Prohibited Basis: Unemployment Income and the ECOA

The COVID-19 pandemic has upended many aspects of American life over the past few months, especially in terms of the U.S. workforce. Applications for unemployment compensation have soared during the pandemic, and the U.S. unemployment rate has reached levels not seen since the Great Depression. You can read more in NAFCU’s newsroom. Given the rise in the number of Americans receiving unemployment compensation, it might be helpful to review some potential fair lending implications credit unions serving members who receive this type of income may face.

Does Regulation B Address Unemployment Compensation?

The Equal Credit Opportunity Act (ECOA) and Regulation B prohibit discrimination based upon a “prohibited basis.” Section 1002.2 of Regulation B defines the term “prohibited basis”:

Prohibited basis means race, color, religion, national origin, sex, marital status, or age (provided that 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.

While it might not be surprising that the ECOA and Regulation B would prohibit discrimination based upon race, religion, sex, or age, some might be surprised to learn that the definition of “prohibited basis” includes “the fact that all or part of the applicant’s income derives from any public assistance program.”

But does “public assistance program” include unemployment compensation? The staff commentary for the definition of “prohibited basis” clarifies that:

“Any Federal, state, or local governmental assistance program that provides a continuing, periodic income supplement, whether premised on entitlement or need, is “public assistance” for purposes of the regulation. The term includes (but is not limited to) Temporary Aid to Needy Families, food stamps, rent and mortgage supplement or assistance programs, social security and supplemental security income, and unemployment compensation…” (emphasis added).

As section 1002.2 and the staff commentary make clear, Regulation B prohibits discrimination on the basis of the fact that the applicant derives income from unemployment compensation.

When Unemployment Compensation May be Considered

Receiving income through a public assistance program (like unemployment compensation) is treated somewhat differently from the other prohibited bases – like race, religion, or gender – in that  Regulation B actually provides for some situations in which the receipt of income from a public assistance program can be considered by a credit union.  Section 1002.4 of Regulation B prohibits a credit union from denying a loan application based solely upon the member’s receipt of unemployment compensation. However, section 1002.6(b)(2)(iii) notes that a credit union may consider the applicant’s receipt of income derived from a public assistance program as part of a “judgmental system of evaluating creditworthiness” and if such consideration is done “only for the purpose of determining a pertinent element of creditworthiness.”

In this way, receipt of unemployment compensation is similar to immigration status. As discussed in a previous post in NAFCU’s Compliance Blog, immigration status is another prohibited basis under Regulation B, but it may be considered for the effect that it may have on the applicant’s ability to repay.

Putting Regulation B Into Practice

Regulation B applies for the life of the credit transaction, as the CFPB noted in a 2013 summary of the ECOA, stating: “the regulation covers creditor activities before, during, and after the extension of credit.” This means that Regulation B would also prohibit a credit union from taking certain actions towards an existing account, such as lowering a credit limit or raising the interest rate, based solely upon the member’s receipt of unemployment compensation. 

However, Regulation B does allow the credit union to consider the effect that receipt of unemployment compensation may have on the applicant or borrower’s creditworthiness, and the staff commentary to section 1002.6(b)(2)(iii) specifically notes that a credit union may take into account ““[t]he length of time an applicant will likely remain eligible to receive such income.”

The duration of unemployment compensation varies by state and can be dependent on the individual’s circumstances. Credit unions wishing to consider an applicant’s unemployment income may need to review and determine its duration on a case-by-case basis. Generally speaking, unemployment compensation is capped at 26 weeks (6 months), so a credit union could potentially consider the fact that this source of income could disappear after 6 months, potentially leaving the applicant with less or no income after that time. For example, Regulation B may allow the credit union to consider the temporary nature of the unemployment compensation when evaluating the creditworthiness of an applicant who has applied for a lengthy extension of credit.  

A credit union may want to document in its policies and procedures how the receipt of unemployment compensation will be considered for determining creditworthiness under section 1002.6, which could potentially help to mitigate any risk of claims that the credit union violated ECOA or Regulation B by making a credit decision solely based on an applicant’s receipt of unemployment compensation.

About the Author

Nick St. John, Regulatory Compliance Counsel, NAFCU

Nick St. John, Regulatory Compliance Counsel, NAFCUNick St. John, was named regulatory compliance counsel in March 2020. In this role, Nick helps credit unions with a variety of compliance issues.

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