Credit Applications

A credit application should, at the minimum, gather information concerning who the potential lessee is as well as information that can be verified concerning the lessee's identity. Specifically, the application should elicit information concerning the lessee's organization. Is the lessee a corporation, limited liability company, limited partnership, general partnership, limited liability partnership, or sole proprietor? Knowing this will help you determine whether someone else may be responsible for payment if the lessee does not pay. How long has the lessee been in business? Obtain the date the lessee was organized, where it is organized, and the federal tax identification number. Who are the owners of the lessee? Obtain their names, addresses, phone numbers, and office or position held. What type of ownership interest do they hold and in what percentage? The credit application is also the time to obtain lessee references. Specifically, where does the lessee bank? This is also the time to obtain trade references. The credit application should also provide permission to the potential lessor to contact the references.

The thoroughness of the answers will reveal in the first instance whether the potential lessee is seriously interested in doing business with the lessor. This information verified, by checking with the secretary of state where the lessee is organized or by calling the lessee's trade and bank references, can help assist in determining whether this relationship is worth the credit risk. The credit application should also require that if in the future the lessee's ownership changes, this must be disclosed to the lessor, and it should explain that the lease is not assignable without the written consent of the lessor. Furthermore, the credit application may reinforce other terms and conditions that will be incorporated into the actual lease. It is most important that any terms and conditions contained in the credit application are consistent with those terms and conditions contained in the lease agreement. If there is any inconsistency, this will create ammunition for the lessee if a dispute arises in the future. Finally, the credit application should be signed with an acknowledgement from the potential lessee that the terms and conditions are accepted and agreed. The person executing the credit application should also state that he or she has the authority to bind the lessee and is authorized to sign on its behalf.

In the event that the lessee files a bankruptcy proceeding in the future, the information provided by a credit application, and which the lessor relies upon, may be the basis for a claim that the unpaid balance on the lease is not dischargeable. False information concerning financial condition provided in writing may form the basis of a claim by the lessor against the lessee that cannot be discharged. Thus, care must be taken to preserve the information obtained so that it is available in the future if it is needed.

Guaranty By Officer of Lessee

The credit application also provides the opportunity to obtain a guaranty of the lessee's debt. To withstand a challenge to a guaranty contained in a credit application, the lessor should make sure that the guaranty portion is clearly delineated from the other portions of the application. The guaranty should state clearly that the guarantor individual is guaranteeing payment of the underlying lease obligations. The guarantor must sign as an individual and not as an officer or manager of the entity that will be the lessee. A valid guaranty must state consideration for providing the guaranty, even if it is to the effect that the guarantor is the principal of the lessee and is willing to provide the guaranty as a requirement of the lessor entering into the lease with the lessee. A guaranty that is hidden on the back of the credit application, in small print, and not easily distinguished, may be challenged as not enforceable.

ECOA Considerations

The wide breadth of the ECOA causes it to affect many lessors who routinely evaluate the credit worthiness of their customers. (Note, the terms 'creditor' and 'lessor' will be used interchangeably during the discussion of ECOA.) For this reason, it is important for all lessors involved in leasing equipment to have procedures in place and employees trained in those procedures in order to ensure effective compliance with the law. Congress wrote the ECOA in broad language, and it is interpreted by Federal Regulation B in even more expansive terms. All businesses that deal with any type of credit transaction need to be aware of the Act's provisions and be cognizant of simple steps they can take to avoid liability under the Act. The 10 questions and answers that follow are designed to give lessors a better understanding of the Act's breadth and the preventive measures they can take to help manage their liability risks.

1) What Is the Equal Credit Opportunity Act?

The ECOA is a subchapter of the Federal Consumer Credit Protection Act. Regulation B, issued by the Board of Governors of the Federal Reserve System, provides guidance regarding the interpretation and enforcement of the ECOA.

The ECOA prohibits any creditor from discriminating against any applicant for credit with respect to race, color, religion, sex, marital status, age, participating in public assistance programs, or for exercising his or her rights under the Act. A creditor is deemed to have discriminated under the Act if it treats an applicant or potential applicant less favorably based upon one of the above factors. In addition, under the ECOA, a creditor is liable for any statement, in advertising or otherwise, that might discourage on a prohibited basis a reasonable applicant or prospective applicant from applying for credit from the particular creditor. It is important to recognize that discrimination under the ECOA is measured by an 'effects test' and is not simply based upon ill intent or malicious intent. Thus, even if a creditor does not intentionally mean to discriminate, it can be held liable under the Act if the effects of its action result in discrimination toward one of the above protected groups.

To establish a prima facie case under the ECOA, a plaintiff must establish four elements. First, it must establish that it is a member of a protected class. Second, it must demonstrate that it applied for and was denied credit. Third, the plaintiff must be denied credit. Finally, the creditor must continue to approve credit applications for applicants with qualifications similar to those of the plaintiff.

2) Who Qualifies As a Creditor under the ECOA?

The ECOA defines a creditor as anyone who 'regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.'

Regulation B elaborates upon this definition and asserts that the term 'creditor' under the ECOA was designed to include all persons who regularly make credit decisions including decisions regarding credit terms. The definition also includes persons who routinely refer applicants or prospective applicants to creditors. In addition, persons who select or offer to select creditors to whom requests may be made for potential applicants are also considered creditors under the ECOA.

The definition of creditor under the ECOA and Regulation B is very broad and encompasses many individuals and businesses that may not traditionally consider themselves creditors. It is important for all businesses, including lessors of equipment, to determine whether they fall within the definition of creditor as described in the Act and the Regulations. They can then determine all aspects of their business where they are wearing their 'creditor' hat in order to accurately assess which areas of their business place them at risk for liability under the ECOA.

3) Who Does the ECOA Consider Applicants?

The ECOA defines an applicant as 'any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly.' Under the Act, the term 'person' includes natural persons, corporations, governmental agencies and subdivisions, trusts, estates, associations, partnerships, and cooperations. Regulation B specifies that this definition includes persons who may become contractually liable regarding an extension of credit. Additionally, guarantors, sureties, and endorsers are also applicants under the ECOA.

Creditors need to be aware of the breadth of this definition and understand that potential applicants, as well as formal applicants, fall under the provision of the Acts. Additionally, it is important for creditors to remember that indirect applications for credit also fall within the purview of the Act.

4) How Broad Is the ECOA?

The ECOA applies to credit transactions. The statute and Regulation B define the term 'credit transaction' very broadly to encompass all aspects of a prospective applicant's dealings with a potential creditor. Requests and requirements for information, the particular investigation procedures used by a creditor, a creditor's standards of creditworthiness and terms of credit all fall under the term 'credit transaction.' Similarly, the manner in which a creditor furnishes credit information to third parties is also subject to regulation under the Act, as well as a creditor's collection procedures. Finally, a creditor's revocation, alteration, and termination of credit procedures also qualify as credit transactions under the ECOA.

A creditor's preventive policies and training practices should reflect the breadth of this definition. Creditors must emphasize to employees the importance of impartiality in all aspects of dealing with potential applicants through all stages of a particular credit transaction.

5) What Type of Information Can a Creditor Ask for under the ECOA?

Under the ECOA, a creditor may not ask for information regarding an applicant or potential applicant's race, color, religion, national origin, or sex unless the information is required as part of an optional self test, or the form optionally requires an applicant to provide a title such as 'Mr.' or 'Mrs.' Limitations under the Act also exist for the type of information a creditor can seek from an applicant or potential applicant regarding a spouse or former spouse, marital status, income from alimony, child support or separate maintenance, child bearing, and child rearing. In contrast, however, a creditor may ask about an applicant or potential applicant's permanent residency or immigration status.

It is important that creditors train employees, particularly those who will be interviewing potential applicants or taking applications from potential applicants, about what constitutes permissible and impermissible questions. What may seem like a harmless or 'small talk'-type question to an employee may encroach upon forbidden ground under the Act's strict provisions.

6) What Constitutes an Adverse Action under the ECOA?

Under the statute, the term 'adverse action' includes the revocation or denial of credit to an applicant, change in the terms of a credit agreement already in existence, and/or a refusal on behalf of a creditor to grant credit in substantially the same amount or upon substantially the same terms as requested.

The term 'adverse action' does not encompass a refusal to extend additional credit under an existing credit agreement whether the requesting applicant is currently in default, or otherwise delinquent or a refusal to extend credit beyond a prior established credit limit. Thus, if a decision is made not to sell on credit or to revoke credit terms, the decision should be recorded based upon the financial situation of the buyer/applicant.

Regulation B specifies that changing the terms of an account with the express agreement of the applicant is permissible. Similarly, a creditor may refuse to extend credit to an applicant if a creditor does not offer the particular type of credit or the particular type of credit plan requested by a prospective applicant. A creditor may also act or forebear to act upon an account on the basis of inactivity, default, or delinquency without fear that a court would characterize the action as an adverse action under the ECOA.

7) What Notification Requirements Are Contained in the ECOA?

The Act also specifies that generally within 30 days a creditor must provide an applicant against whom adverse action is taken with a statement detailing the reasons behind the adverse action. Creditors may satisfy this requirement by either regularly providing all applicants against whom adverse action is taken with written notifications explaining why such action was taken, or by providing written or oral notice of an applicant's ability to request such an explanation within 30 days.

In contrast to the above requirement, Congress adopted a more flexible notification requirement for business credit applicants with gross revenues of more than $1 million. For this class of business applicants, creditors must give notice of any adverse action within a 'reasonable time.'

To avoid liability under the Act, it is a good idea to formalize and make routine notice practices. Employees should be trained in these procedures and steps should be taken to ensure that procedures are followed regularly.

8) What Records Should a Business Be Required to Maintain under the ECOA?

Under the Act, creditors are required to retain records of any action taken on an application for a certain period of time. If the action pertains to a consumer, the creditor must maintain the record for 25 months. If the action pertains to a business, the creditor must generally retain the record for 12 months. If the business applicant had gross revenue of more than $1 million for the prior fiscal year, a creditor need only retain the records for 60 days.

The records required to be retained under the Act include the application received and any information used to make the decision, a copy of the notification given to the applicant and a statement describing the reasoning behind such action, and any writing received by the creditor from the applicant alleging a violation of the statute or Regulation B.

9) What Happens If a Lessor Violates the ECOA?

A Lessor who violates a provision of the ECOA is liable for all actual damages sustained by the applicant either as an individual or as a member of a class. In addition to actual damages, punitive damages are also available. For creditors other than a government or governmental subdivisions or agency, punitive damages are capped at $10,000 for an individual creditor and $500,000 for a class action (or 1% of the net worth of the creditor).

Courts consider several factors when determining whether to award punitive damages and the proper amount of punitive damages for violations of the ECOA. These factors include: 'the amount of any actual damages awarded, the frequency and persistence of failures of compliance by the creditor, the resources of the creditor, the number of persons adversely affected, and the extent to which the creditor's failure of compliance was intentional.' Additionally, it is important to note that attorneys' fees and costs are also available to plaintiffs in ECOA actions. In a recent Southern District of Indiana case, a plaintiff was awarded $10,000 in punitive damages and more than $55,000 in attorneys' fees and costs against a defendant creditor who failed to properly comply with the Act's notice provisions. Therefore, it is important for lessors to realize that once fees and costs are included, damages under the ECOA can be quite substantial.

10) How Can a Company Prevent Violations of the ECOA?

There are five practices that your company should adopt to make sure it limits liability under the Act. First, ensure that credit applications are worded neutrally and do not ask for any prohibited information. Second, make sure that the criteria used to determine the credit-worthiness of a potential customer can be easily measured and documented. Request financial statements and financial references from the buyer that will assist you in making a credit decision, such as the customer's bank or other trade creditors. Check reputable credit reports concerning the potential customer. Third, establish and maintain a systematic method of complying with the Act's notification requirements. If your company determines that a customer is not creditworthy, make sure that you notify the applicant within the 30 days required under the Act. Similarly, if you have requested the guaranty of an individual, make sure that any denial of the guarantor is made timely. Incorporate into the notification a statement recording the date when the credit application was received and when notification was given. Fourth, develop a record retention policy that is in compliance with the Act, and fifth, make sure that your employees understand that your company does not discriminate and that each of them is required to comply with the notification and record retention policy.

Privacy Issues

Lessors requiring the furnishing of financial information and in particular Social Security numbers, credit card numbers, and bank information must be mindful of the various state and federal regulations protecting consumers from financial fraud and thievery of their personal financial information. Lessors obtaining this information through a credit application or otherwise must implement measures that are reasonable and appropriate under the circumstances to protect sensitive financial information. Certain state laws require this, including a new Minnesota statute requiring that a company dispose of credit card security data and other sensitive data within 48 hours after authorization. Failure to dispose of this information properly and consequently causing a breach of security will result in monetary damages to the financial institution.

Thus, it behooves lessors to take stock of how they store information, make sure the information being stored is necessary, make sure it is locked (or kept on a computer not linked to the Internet), and destroyed properly. Finally, each business should have a plan for acting if there is a breach. Excellent guidance for each of these points is available at www.ftc.gov/infosecurity/.

Conclusion

Credit applications are useful tools for lessors. Careful consideration should be given to the information needed now or in the future. Consideration of the mandates of the ECOA should not be ignored, nor should the proper storage and destruction of the information obtained.

Many lessors require or should require their lessees to fill out a credit application. At its most basic, the credit application provides an introduction of the potential lessee to the potential lessor ' both as to its legal organization as well as its financial ability to fulfill its obligations under a lease. Although credit applications assist lessors in making these credit decisions, the lessor should make sure that it avoids the pitfalls of the Equal Credit Opportunity Act ('ECOA') and that the financial information it obtains through the credit application is stored appropriately to avoid liability under various state laws regulating the storage of private financial information. This article discusses the components of a good credit application, the requirements of the ECOA, and the best practices for storing private financial information.

The Credit Application

A credit application can be the initial offer or the initial acceptance that creates the contract between lessor and lessee. A well-drafted credit application should set forth the terms under which the lessor is willing to do business with the lessee. Where a credit application is signed by the lessee, it can also be the demonstration of 'acceptance' of the terms and conditions set forth on the credit application. The requirement that a completed credit application must be furnished prior to entering into the lease provides an incentive to the potential lessee to provide information that it may be reluctant to provide in the future. This incentive gives the lessor the ability to gather information not only to determine the lessee's creditworthiness, but also to gather information that may be useful in the future if collection efforts become difficult.

A credit application should, at the minimum, gather information concerning who the potential lessee is as well as information that can be verified concerning the lessee's identity. Specifically, the application should elicit information concerning the lessee's organization. Is the lessee a corporation, limited liability company, limited partnership, general partnership, limited liability partnership, or sole proprietor? Knowing this will help you determine whether someone else may be responsible for payment if the lessee does not pay. How long has the lessee been in business? Obtain the date the lessee was organized, where it is organized, and the federal tax identification number. Who are the owners of the lessee? Obtain their names, addresses, phone numbers, and office or position held. What type of ownership interest do they hold and in what percentage? The credit application is also the time to obtain lessee references. Specifically, where does the lessee bank? This is also the time to obtain trade references. The credit application should also provide permission to the potential lessor to contact the references.

The thoroughness of the answers will reveal in the first instance whether the potential lessee is seriously interested in doing business with the lessor. This information verified, by checking with the secretary of state where the lessee is organized or by calling the lessee's trade and bank references, can help assist in determining whether this relationship is worth the credit risk. The credit application should also require that if in the future the lessee's ownership changes, this must be disclosed to the lessor, and it should explain that the lease is not assignable without the written consent of the lessor. Furthermore, the credit application may reinforce other terms and conditions that will be incorporated into the actual lease. It is most important that any terms and conditions contained in the credit application are consistent with those terms and conditions contained in the lease agreement. If there is any inconsistency, this will create ammunition for the lessee if a dispute arises in the future. Finally, the credit application should be signed with an acknowledgement from the potential lessee that the terms and conditions are accepted and agreed. The person executing the credit application should also state that he or she has the authority to bind the lessee and is authorized to sign on its behalf.

In the event that the lessee files a bankruptcy proceeding in the future, the information provided by a credit application, and which the lessor relies upon, may be the basis for a claim that the unpaid balance on the lease is not dischargeable. False information concerning financial condition provided in writing may form the basis of a claim by the lessor against the lessee that cannot be discharged. Thus, care must be taken to preserve the information obtained so that it is available in the future if it is needed.

Guaranty By Officer of Lessee

The credit application also provides the opportunity to obtain a guaranty of the lessee's debt. To withstand a challenge to a guaranty contained in a credit application, the lessor should make sure that the guaranty portion is clearly delineated from the other portions of the application. The guaranty should state clearly that the guarantor individual is guaranteeing payment of the underlying lease obligations. The guarantor must sign as an individual and not as an officer or manager of the entity that will be the lessee. A valid guaranty must state consideration for providing the guaranty, even if it is to the effect that the guarantor is the principal of the lessee and is willing to provide the guaranty as a requirement of the lessor entering into the lease with the lessee. A guaranty that is hidden on the back of the credit application, in small print, and not easily distinguished, may be challenged as not enforceable.

ECOA Considerations

The wide breadth of the ECOA causes it to affect many lessors who routinely evaluate the credit worthiness of their customers. (Note, the terms 'creditor' and 'lessor' will be used interchangeably during the discussion of ECOA.) For this reason, it is important for all lessors involved in leasing equipment to have procedures in place and employees trained in those procedures in order to ensure effective compliance with the law. Congress wrote the ECOA in broad language, and it is interpreted by Federal Regulation B in even more expansive terms. All businesses that deal with any type of credit transaction need to be aware of the Act's provisions and be cognizant of simple steps they can take to avoid liability under the Act. The 10 questions and answers that follow are designed to give lessors a better understanding of the Act's breadth and the preventive measures they can take to help manage their liability risks.

1) What Is the Equal Credit Opportunity Act?

The ECOA is a subchapter of the Federal Consumer Credit Protection Act. Regulation B, issued by the Board of Governors of the Federal Reserve System, provides guidance regarding the interpretation and enforcement of the ECOA.

The ECOA prohibits any creditor from discriminating against any applicant for credit with respect to race, color, religion, sex, marital status, age, participating in public assistance programs, or for exercising his or her rights under the Act. A creditor is deemed to have discriminated under the Act if it treats an applicant or potential applicant less favorably based upon one of the above factors. In addition, under the ECOA, a creditor is liable for any statement, in advertising or otherwise, that might discourage on a prohibited basis a reasonable applicant or prospective applicant from applying for credit from the particular creditor. It is important to recognize that discrimination under the ECOA is measured by an 'effects test' and is not simply based upon ill intent or malicious intent. Thus, even if a creditor does not intentionally mean to discriminate, it can be held liable under the Act if the effects of its action result in discrimination toward one of the above protected groups.

To establish a prima facie case under the ECOA, a plaintiff must establish four elements. First, it must establish that it is a member of a protected class. Second, it must demonstrate that it applied for and was denied credit. Third, the plaintiff must be denied credit. Finally, the creditor must continue to approve credit applications for applicants with qualifications similar to those of the plaintiff.

2) Who Qualifies As a Creditor under the ECOA?

The ECOA defines a creditor as anyone who 'regularly extends, renews, or continues credit; any person who regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who participates in the decision to extend, renew, or continue credit.'

Regulation B elaborates upon this definition and asserts that the term 'creditor' under the ECOA was designed to include all persons who regularly make credit decisions including decisions regarding credit terms. The definition also includes persons who routinely refer applicants or prospective applicants to creditors. In addition, persons who select or offer to select creditors to whom requests may be made for potential applicants are also considered creditors under the ECOA.

The definition of creditor under the ECOA and Regulation B is very broad and encompasses many individuals and businesses that may not traditionally consider themselves creditors. It is important for all businesses, including lessors of equipment, to determine whether they fall within the definition of creditor as described in the Act and the Regulations. They can then determine all aspects of their business where they are wearing their 'creditor' hat in order to accurately assess which areas of their business place them at risk for liability under the ECOA.

3) Who Does the ECOA Consider Applicants?

The ECOA defines an applicant as 'any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly.' Under the Act, the term 'person' includes natural persons, corporations, governmental agencies and subdivisions, trusts, estates, associations, partnerships, and cooperations. Regulation B specifies that this definition includes persons who may become contractually liable regarding an extension of credit. Additionally, guarantors, sureties, and endorsers are also applicants under the ECOA.

Creditors need to be aware of the breadth of this definition and understand that potential applicants, as well as formal applicants, fall under the provision of the Acts. Additionally, it is important for creditors to remember that indirect applications for credit also fall within the purview of the Act.

4) How Broad Is the ECOA?

The ECOA applies to credit transactions. The statute and Regulation B define the term 'credit transaction' very broadly to encompass all aspects of a prospective applicant's dealings with a potential creditor. Requests and requirements for information, the particular investigation procedures used by a creditor, a creditor's standards of creditworthiness and terms of credit all fall under the term 'credit transaction.' Similarly, the manner in which a creditor furnishes credit information to third parties is also subject to regulation under the Act, as well as a creditor's collection procedures. Finally, a creditor's revocation, alteration, and termination of credit procedures also qualify as credit transactions under the ECOA.

A creditor's preventive policies and training practices should reflect the breadth of this definition. Creditors must emphasize to employees the importance of impartiality in all aspects of dealing with potential applicants through all stages of a particular credit transaction.

5) What Type of Information Can a Creditor Ask for under the ECOA?

Under the ECOA, a creditor may not ask for information regarding an applicant or potential applicant's race, color, religion, national origin, or sex unless the information is required as part of an optional self test, or the form optionally requires an applicant to provide a title such as 'Mr.' or 'Mrs.' Limitations under the Act also exist for the type of information a creditor can seek from an applicant or potential applicant regarding a spouse or former spouse, marital status, income from alimony, child support or separate maintenance, child bearing, and child rearing. In contrast, however, a creditor may ask about an applicant or potential applicant's permanent residency or immigration status.

It is important that creditors train employees, particularly those who will be interviewing potential applicants or taking applications from potential applicants, about what constitutes permissible and impermissible questions. What may seem like a harmless or 'small talk'-type question to an employee may encroach upon forbidden ground under the Act's strict provisions.

6) What Constitutes an Adverse Action under the ECOA?

Under the statute, the term 'adverse action' includes the revocation or denial of credit to an applicant, change in the terms of a credit agreement already in existence, and/or a refusal on behalf of a creditor to grant credit in substantially the same amount or upon substantially the same terms as requested.

The term 'adverse action' does not encompass a refusal to extend additional credit under an existing credit agreement whether the requesting applicant is currently in default, or otherwise delinquent or a refusal to extend credit beyond a prior established credit limit. Thus, if a decision is made not to sell on credit or to revoke credit terms, the decision should be recorded based upon the financial situation of the buyer/applicant.

Regulation B specifies that changing the terms of an account with the express agreement of the applicant is permissible. Similarly, a creditor may refuse to extend credit to an applicant if a creditor does not offer the particular type of credit or the particular type of credit plan requested by a prospective applicant. A creditor may also act or forebear to act upon an account on the basis of inactivity, default, or delinquency without fear that a court would characterize the action as an adverse action under the ECOA.

7) What Notification Requirements Are Contained in the ECOA?

The Act also specifies that generally within 30 days a creditor must provide an applicant against whom adverse action is taken with a statement detailing the reasons behind the adverse action. Creditors may satisfy this requirement by either regularly providing all applicants against whom adverse action is taken with written notifications explaining why such action was taken, or by providing written or oral notice of an applicant's ability to request such an explanation within 30 days.

In contrast to the above requirement, Congress adopted a more flexible notification requirement for business credit applicants with gross revenues of more than $1 million. For this class of business applicants, creditors must give notice of any adverse action within a 'reasonable time.'

To avoid liability under the Act, it is a good idea to formalize and make routine notice practices. Employees should be trained in these procedures and steps should be taken to ensure that procedures are followed regularly.

8) What Records Should a Business Be Required to Maintain under the ECOA?

Under the Act, creditors are required to retain records of any action taken on an application for a certain period of time. If the action pertains to a consumer, the creditor must maintain the record for 25 months. If the action pertains to a business, the creditor must generally retain the record for 12 months. If the business applicant had gross revenue of more than $1 million for the prior fiscal year, a creditor need only retain the records for 60 days.

The records required to be retained under the Act include the application received and any information used to make the decision, a copy of the notification given to the applicant and a statement describing the reasoning behind such action, and any writing received by the creditor from the applicant alleging a violation of the statute or Regulation B.

9) What Happens If a Lessor Violates the ECOA?

A Lessor who violates a provision of the ECOA is liable for all actual damages sustained by the applicant either as an individual or as a member of a class. In addition to actual damages, punitive damages are also available. For creditors other than a government or governmental subdivisions or agency, punitive damages are capped at $10,000 for an individual creditor and $500,000 for a class action (or 1% of the net worth of the creditor).

Courts consider several factors when determining whether to award punitive damages and the proper amount of punitive damages for violations of the ECOA. These factors include: 'the amount of any actual damages awarded, the frequency and persistence of failures of compliance by the creditor, the resources of the creditor, the number of persons adversely affected, and the extent to which the creditor's failure of compliance was intentional.' Additionally, it is important to note that attorneys' fees and costs are also available to plaintiffs in ECOA actions. In a recent Southern District of Indiana case, a plaintiff was awarded $10,000 in punitive damages and more than $55,000 in attorneys' fees and costs against a defendant creditor who failed to properly comply with the Act's notice provisions. Therefore, it is important for lessors to realize that once fees and costs are included, damages under the ECOA can be quite substantial.

10) How Can a Company Prevent Violations of the ECOA?

There are five practices that your company should adopt to make sure it limits liability under the Act. First, ensure that credit applications are worded neutrally and do not ask for any prohibited information. Second, make sure that the criteria used to determine the credit-worthiness of a potential customer can be easily measured and documented. Request financial statements and financial references from the buyer that will assist you in making a credit decision, such as the customer's bank or other trade creditors. Check reputable credit reports concerning the potential customer. Third, establish and maintain a systematic method of complying with the Act's notification requirements. If your company determines that a customer is not creditworthy, make sure that you notify the applicant within the 30 days required under the Act. Similarly, if you have requested the guaranty of an individual, make sure that any denial of the guarantor is made timely. Incorporate into the notification a statement recording the date when the credit application was received and when notification was given. Fourth, develop a record retention policy that is in compliance with the Act, and fifth, make sure that your employees understand that your company does not discriminate and that each of them is required to comply with the notification and record retention policy.

Privacy Issues

Lessors requiring the furnishing of financial information and in particular Social Security numbers, credit card numbers, and bank information must be mindful of the various state and federal regulations protecting consumers from financial fraud and thievery of their personal financial information. Lessors obtaining this information through a credit application or otherwise must implement measures that are reasonable and appropriate under the circumstances to protect sensitive financial information. Certain state laws require this, including a new Minnesota statute requiring that a company dispose of credit card security data and other sensitive data within 48 hours after authorization. Failure to dispose of this information properly and consequently causing a breach of security will result in monetary damages to the financial institution.

Thus, it behooves lessors to take stock of how they store information, make sure the information being stored is necessary, make sure it is locked (or kept on a computer not linked to the Internet), and destroyed properly. Finally, each business should have a plan for acting if there is a breach. Excellent guidance for each of these points is available at www.ftc.gov/infosecurity/.

Conclusion

Credit applications are useful tools for lessors. Careful consideration should be given to the information needed now or in the future. Consideration of the mandates of the ECOA should not be ignored, nor should the proper storage and destruction of the information obtained.