The Inadvertent Error Defense to Violations of the Equal Credit Opportunity Act

The Equal Credit Opportunity Act (the “ECOA”) prohibits creditors from discriminating against credit applicants based on race, religion, sex, national origin, marital status, and age among other things.  Penalties for violations of the ECOA were discussed in a previous blog post , where we also mentioned that not every failure to comply with the ECOA results in civil penalties.  Sometimes a failure to comply with the ECOA is the result of an “inadvertent error,” which is not considered a violation.

Defined in 12 C.F.R. § 1002.2(s), an inadvertent error is “a mechanical, electronic, or clerical error that a creditor demonstrates was not intentional and occurred notwithstanding the maintenance of procedures reasonably adapted to avoid such errors.”  Creditors should understand this defense has very limited utility, as it only applies to specific violations of the ECOA as set forth in 12 C.F.R. § 1002.16(c), such as certain notification requirements, a failure to retain certain records, or misinterpretation of a code on a credit report.

To rely on the inadvertent error defense, the creditor bears the burden of proving its procedures are designed to avoid and subsequently prevent these types of inadvertent errors. A creditor must show more than just the “maintenance of procedures reasonably adapted to avoid such errors.”  Further, 12 C.F.R. § 1002.16(c) requires that inadvertent errors under §§ 1002.9 (notifications) and 1002.10 (furnishing of credit information on creditor’s spouse) must be “correct[ed] as soon as possible.”  Although a specific timeframe is not set forth in the statute, one court noted that two months from the time of discovery to corrective action was too long.  Courts have also held that where a creditor refused to correct an inadvertent error under § 1002.9 (notifications), it was not entitled to use the defense.

Regardless of whether a creditor’s failure to comply with the ECOA is the result of an inadvertent error, it is wise for a lender to correct the violation immediately, and put procedures in place to avoid subsequent errors.