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What Is the Equal Credit Opportunity Act?

Tim Maxwell
By
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The Equal Credit Opportunity Act (ECOA) is a federal regulation that forbids lenders from discriminating against loan applicants based on personal criteria. The purpose of the law, which was enacted in 1974, is to make sure that creditors' decisions are based strictly on financial factors, such as income, debt and credit history. Additionally, the act requires lenders who turn you down for credit to disclose their reasons for doing so.

Here's what you need to know about how the Equal Credit Opportunity Act works to prohibit credit discrimination and ensure everyone has a fair shot at obtaining a loan or line of credit.

What Is the Equal Credit Opportunity Act?

The Equal Credit Opportunity Act makes it illegal for any creditor to discriminate against an applicant based on race, color, religion, national origin, sex, marital status, age, usage of public assistance or good faith exercise of any rights under the Consumer Credit Protection Act. The ECOA also entitles applicants to receive an explanation when a creditor denies their credit.

The law came about in the early 1970s when women commonly faced different standards and stricter lending criteria than their male counterparts. Banks and other financial institutions often charged higher interest rates and required larger down payments from women than men despite comparable incomes and financial means.

The ECOA was later expanded in 1976 to forbid discrimination based on the following characteristics:

Under the ECOA, a lender may not discriminate against any of the protected characteristics above when making loan or credit decisions. For example, a creditor may not deny credit, require a cosigner or charge higher interest rates based on the above reasons. The act applies to consumer, business and commercial lending decisions.

For a full accounting of the ECOA regulation, you can read it in its entirety here.

Rights Protected by the Equal Credit Opportunity Act Rights

When you apply for new credit, you are guaranteed specific rights under the ECOA, including the right to have your application fairly evaluated solely on the basis of relevant financial criteria like your credit history, income and debt.

The ECOA grants you numerous protective rights, such as:

  • A lender can't discourage you from applying for credit.
  • Lenders can't discriminate against you based on the protected characteristics listed above.
  • Lenders and creditors can't consider your race, sex or national origin when making credit decisions, but they do have the right to ask for this information. You have the right to withhold this information or disclose it voluntarily.
  • Lenders can't make approval decisions or impose unfair terms or conditions based on race, sex, gender or other protected characteristics.
  • Lenders can't ask about your marital status if you're applying for credit independently except in some community property states (Arizona, California, Idaho, Louisiana, Nevada, Texas, Washington and Wisconsin).
  • You have the right to apply for credit in your maiden name, married name or a combination of the two.
  • Lenders can't ask if you plan on having kids, but they can ask about the costs associated with your children.
  • You are entitled to receive a lending decision within 30 days of submitting your application. If your application is denied, you have the right to receive a written explanation disclosing the reason(s) for the denial.

Factors That Creditors Can Legally Consider

While lenders and creditors can't base lending decisions on personal criteria like race, sex or religion, they can—and do—consider your credit and financial information, such as:

  • Credit scores: Your credit score is a three-digit number based on the information contained in your credit report. Your score, which usually ranges from 300 to 850, gives an idea of the risk you present as a borrower, with higher scores representing lower risk.
  • Payment history: Your credit report lists the past and current credit accounts you've handled. Lenders review your payment history to see how long you've managed credit and whether or not you make your monthly payments on time.
  • Income: Lenders must assess your ability to repay any credit or loan you apply for. As such, lenders typically review your income to ensure it's sufficient to continue paying your bills and any new credit.
  • Debt-to-income ratio (DTI): Your debt-to-income ratio is the amount of your monthly debt obligations compared to your gross monthly income. Generally, your DTI should be less than 50% to get approved for a credit or loan, although mortgage lenders often require a DTI ratio of 43% or less.
  • Employment history: Lenders can legally consider your job history because it helps them judge your financial ability to repay the debt. For example, if you've worked several years at the same company, a lender is likely to view you as less risky than a newly hired applicant.

What to Do if You Feel a Lender Has Violated the ECOA

If you suspect a lender or financial institution is discriminating against you and violating the ECOA, you can contact the lender to resolve the matter. Additionally, you can take any of the following actions:

FAQ

Here are some answers to commonly asked questions about the Equal Credit Opportunity Act.

  • The Equal Credit Opportunity Act protects you against credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, receiving public assistance or good faith exercise of any rights under the Consumer Credit Protection Act. You also have the right to receive a written explanation of why a lender denies credit to you.

  • The CFPB has the authority to write ECOA rules and supervise institutions for compliance, sharing the latter duty with other federal agencies such as the Federal Reserve Board, Federal Deposit Insurance Corp. (FDIC) and National Credit Union Administration (NCUA). Additionally, the CFPB enforces ECOA regulations along with the Department of Justice and the Federal Trade Commission.

  • Because credit discrimination can be hard to detect, the CFPB offers a breakdown of warning flags to look out for, including:

    • If you are treated differently in person than online or over the phone
    • If a lender discourages you from submitting a credit application
    • If you are directed to apply for a loan type with higher rates or other unfavorable terms
    • If you witness the lender speaking negatively about race, age, sex, gender identity or other protected classes
    • If a lender denies you credit despite meeting their advertised requirements
    • If a lender offers you credit at a higher rate than you applied for, despite qualifying for a lower rate

  • If a lender violates ECOA provisions, they can be held responsible and sued for damages in an individual or class action lawsuit. If the lender is found guilty, they can be liable for up to $10,000 in damages in individual lawsuits or $500,000 or 1% of the creditors' worth, whichever is less, in class action suits.

Shore Up Your Credit

Undoubtedly, the Equal Credit Opportunity Act has helped curb instances of credit discrimination. However, it's wise to take action if you feel your credit is unfairly denied or you received less favorable terms than someone with the same qualifications. In that case, contact the CFPB online or call the agency at 855-411-2372 to file a complaint (or refer to your other options above).

While you're at it, consider reviewing your credit report and credit score for free with Experian. Doing so can help you spot any potential issues that could hurt your credit approval odds or ability to obtain the best terms. Look for erroneous or fraudulent information on your reports, which could be harming your score. Remember, you have the right to dispute any mistakes on your report.

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