People use credit for different reasons — whether to buy a car, a home, or an education, or to have extra financial support when emergencies happen — and everyone should have equal access to credit based solely on their financial situation, credit score, and credit history.
Unfortunately, history proves that equal access has not always been the norm.
Hence the creation of the Equal Credit Opportunity Act of 1974, or the ECOA. This act protects consumers from experiencing discrimination from lenders or banks on the basis of race, color, religion, national origin, sex/gender, marital status, age, or if they receive access to public assistance. But what is the ultimate purpose of this act, and how does it work? If, as a consumer, you believe you’ve experienced discrimination, what are you supposed to do?
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What Is the Equal Credit Opportunity Act of 1974?
The Equal Credit Opportunity Act is a consumer protection aimed at preventing discrimination in lending practices. According to the Federal Trade Commission (FTC):
“The Federal Trade Commission (FTC), the nation’s consumer protection agency, enforces the Equal Credit Opportunity Act (ECOA), which prohibits credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or because you get public assistance. Creditors may ask you for most of this information in certain situations, but they may not use it when deciding whether to give you credit or when setting the terms of your credit.”
This act is one of many consumer protections that the FTC enforces on banks and lending institutions to prevent discrimination, scams, or predatory practices. Lenders and banks are only allowed to decide on your credit worthiness by looking over your income, credit score, credit history, and monthly expenses (including current debts). Any decisions made that also consider your race, gender, or other protected status are considered illegal practices by the FTC, as outlined in the ECOA. You can read more about the specific protections on the FTC’s website.
What Is the Purpose of the Equal Credit Opportunity Act?
To fully understand the importance of the ECOA, you may need to understand the historical context of this Congressional Act and why it was created in the first place. During the 1960’s, the credit market was growing rapidly — but only for a select few.
African Americans, Hispanics, and other minority groups were regularly denied loans for homes (sometimes entire neighborhoods were singled out via a process known as “redlining”), and many still experience discrimination today in the form of higher interest rates or denied loan applications. Historical discrimination, as well as its current iteration, has created a ripple effect that has furthered the modern day racial wealth gap. Without access to owning property or financing businesses, generations of people in minority groups have lost out on the “American dream.”
Additionally, many women were denied credit, with some banks stating that women needed the approval of their husband before they could grant credit. Single women were often denied loans outright.
However, due to the Civil Rights Movement of the late 1960’s, lawmakers took note of some of the ways in which minority groups were being disenfranchised by banking institutions from participating in American traditions such as homeownership. Already, the Civil Rights Act of 1968 had included a “Fair Housing Act” (Title VIII) that prevented discrimination on the part of homeowners who refused to sell or rent out homes to people of a protected class. But as banks continued to engage in unfair practices, a House committee took action and created the Equal Credit Opportunity Act, and it was unanimously voted into law in 1974. A woman on the committee, Lindy Boggs, ensured that the ECOA included “marital status” and “sex/gender” to ensure that women also were protected by this law.
Has the ECOA Worked?
Although an extremely important law, the ECOA has not stopped discriminatory practices altogether, and, unfortunately, some banks and lenders will still regularly deny loans to consumers with a protected minority status. They may not outright admit their prejudice, as they don’t want to be found guilty of violating the ECOA, but they may find other reasons to reject loan applicants that are less likely to raise suspicion, such as zip code location or lack of credit history (despite a good credit score).
Additionally, the effects of past policies, such as redlining, have made it difficult for current generations to build up the strong financial foundation needed to purchase a home today. Again, the aftermath of old policies has created a cycle of poverty and instability for current generations.
Despite these setbacks, the ECOA still sets an important standard for lenders and banks, and offers vital protections for those that need it.
ECOA Regulation B
Regulation B is the part of the Act that officially details the authority and scope of the law in relation to the lenders or banks, further defining their liability (as a lender) if they fail to follow the rule of law. It also outlines prohibited practices and the rules that lenders must honor when obtaining and processing a consumer’s credit information.
Some of the prohibited practices, as detailed in Regulation B, include:
- “A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.”
- “A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage, on a prohibited basis, a reasonable person from making or pursuing an application.”
The Regulation goes on to also explain exactly what criteria lenders or banks may use to determine credit worthiness of a consumer. It states on evaluating applicants: “A creditor may consider any information in evaluating applicants, so long as the use of the information does not have the intent or the effect of discriminating against an applicant on a prohibited basis. Generally, a creditor may not:
- “Consider any of the prohibited bases, including age (providing the applicant is old enough, under state law, to enter into a binding contract) and the receipt of public assistance;
- “Use child-bearing or child-rearing information, assumptions, or statistics to determine whether an applicant’s income may be interrupted or decreased;
- “Consider whether there is a telephone listing in the applicant’s name (but the creditor may consider whether there is a telephone in the applicant’s home); or
- “Discount or exclude part-time income from an applicant or the spouse of an applicant.”
There is also an amendment that was added in 2013 stating that banks or lenders are required to give, in writing, an explanation for their decision, as well as free copies of all the appraisals performed on the consumer.
Who Does the ECOA Apply To?
The ECOA applies to any person that is of a protected class and actively seeking out credit from a bank or lender. The FTC enforces the ECOA to protect consumers from banks or lenders that use discriminatory lending practices. Additionally, the ECOA protects those who are living on public assistance, such as veteran’s benefits, social security or disability income, or child support.
According to the FTC’s website, creditors and banks may not use the following information when making credit decisions:
- Your age, unless:
- You are under the age of 18, or whatever the age of adulthood is in the state you are residing.
- You’re at least 62, as this should allow the creditor (and the credit scoring system) to favor you due to your age.
- Your age is related to other factors that may influence your credit score or income. For example, if you’re nearing the age of retirement, then the creditor is allowed to factor in that your income may drop or become fixed as you enter into retirement. Additionally, your length of employment — although related to your age — should be considered separately from your age.
- If you are of child-rearing age, the creditor may not consider your potential to have or not have children as a factor in the credit decision process. (They cannot assume that you will leave work to have a child, and thus put a temporary stop to your income.)
- If you have a telephone account in your name, although they are allowed to ask if you have a telephone at all.
- The zip code and racial composition of the neighborhood you are currently living in, or the neighborhood you wish to move to.
- Your race, color, religion, national origin, sex/gender, marital status, or whether you get public assistance of any sort.
- Public assistance can include government assistance (food stamps, social security income, etc) as well as child support or alimony from a divorce (although a creditor may ask for proof that this form of income is reliable). More examples of public assistance programs can be found on the Census Bureau’s website.
- Public assistance must be considered as an additional form of income, as long as it is reliable.
The ECOA is enforced by the Consumer Finance Protection Bureau (CFPB) and the Department of Justice (DOJ), as well as some state and federal banking agencies. In general, the CFPB is specifically designed to protect consumers only, so they are often the front-line of defense for consumers that experience discrimination in lending practices.
Banks or lenders that are found to be in violation of the ECOA (either through complaints, interviews of staff, or obvious written or oral confirmation) may have to go to court and pay a fine as well as any damages caused to the consumer. If a bank reports its own violation against an individual creditor that violated the ECOA, the bank may be exempt from fines, and the creditor may be taken to court instead, as well as be discharged or fired from the lending institution.
If found guilty in a court of law, banks may have to pay for actual damages and punitive damages of up to $10,000 for individual lawsuits, or up to $500,000 (or 1% of their net worth) in a class-action lawsuit.
However, it’s rather rare to have an ECOA case go to court in the first place. As the FTC suggests, they first recommend going to the creditor and explaining the issue to them. Through persuasion, the creditor may be able to reconsider your application and potentially approve it with a more favorable rate. Unfortunately, discrimination is difficult to prove, so it can be tricky to point out outright prejudice unless it is blatantly obvious or noted on paper or recorded orally.
Examples of ECOA Violations
Some common examples of ECOA violation may include:
- The creditor is overheard making derogatory remarks about a particular race, religion, sex/gender, nationality, marital status of an individual, or a person on public assistance.
- The creditor discourages you from applying for a loan without actually looking at your financial information.
- The creditor pressures you into signing a contract for a loan or line of credit, without allowing you to consider your options.
- The creditor denies, rejects, or provides you with a poor loan offer despite the fact that you know your credit and financial history should approve you for a better loan.
- The creditor treats you differently over the phone than they do in person, possibly being nicer over the phone but turning slightly hostile or brusque when meeting you in person.
- The creditor makes a comment about needing your spouse’s signature, even though you can have anyone become a cosigner (not just your spouse).
Reporting an ECOA Violation
If a person believes they have been discriminated against in some form or other while attempting to receive credit from a lender, the FTC recommends multiple ways in which a person can file a complaint. The FTC suggests the following:
- Complain directly to the creditor, as you may be able to point out their issue and persuade the creditor to reconsider your application.
- Check with your state Attorney General’s office to discuss the issue and check to see if the creditor violated any state equal credit opportunity laws. You can also file a complaint through the CFPB.
- Consider suing the creditor in federal district court, or with the aid of the DOJ. Lawsuits can be tedious and take some time, but if you win, you can recover your actual damages and be awarded punitive damages if the court finds that the creditor’s conduct was willful. Of course, it’s important to remember that proving prejudice in court can be difficult, but it may still be worth the effort to pursue a lawsuit.
- Additionally, you might consider finding others with the same claim, and getting together to file a class action suit as a group. It’s recommended to get the advice of a legal expert or attorney to ask what is best for your case.
- The DOJ states on their website: “The Department of Justice may file a lawsuit under ECOA where there is a pattern or practice of discrimination. In cases involving discrimination in home mortgage loans or home improvement loans, the Department may file suit under both the Fair Housing Act and ECOA.”
- Report violations to the appropriate government agency, which would be the FTC in the case of a ECOA violation. If you’ve been denied credit, the creditor must give you the name and address of the agency to contact when providing you with the free copies of the appraisals (as outlined in the latest update to Regulation B).
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