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The Equal Credit Opportunity Act (ECOA) protects consumers against unfair lending practices, like discrimination based on sex, race, and religion. It comes into play when you apply for credit cards and various loans.
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Imagine a world where you can’t qualify for a loan due to your ethnicity or the color of your skin. Or picture a scenario where a bank turns you down for financing because you’re a woman, elderly, divorced, or you practice a religion that the lender doesn’t approve.
Once upon a time (in the not-so-distant past), these were realities that many Americans faced on a daily basis. Nearly 40 years ago, however, these forms of discrimination in lending became illegal. In October of 1974, Congress passed the Equal Credit Opportunity Act.
The Equal Credit Opportunity Act, or the ECOA for short, is a federal civil rights law that protects people when they borrow money. It is one of several consumer credit protection laws that fits under the umbrella of the Consumer Credit Protection Act (CCPA) of 1968.
Lenders and financial institutions must follow the ECOA for many different types of financing. These include personal loans, auto loans, certain real estate loans (like mortgages), student loans, credit cards, small business loans, and more.
Under the ECOA, lenders are not allowed to discriminate against you for any of the following reasons:
Discriminating against credit applicants on the basis of race, gender, or any of the above is against the law. These factors cannot affect your interest rates, down-payment requirements, or any other aspect of a credit transaction.
Lenders are prohibited from asking you about your marital status (or any information about your spouse) in most cases. The exceptions to this rule are as follows:
Furthermore, lenders and financial institutions may not ask you if you are widowed or divorced. Nor may they ask if you plan to have children or how you plan to care for your children. (For example, a question like, “Do you plan to be a stay-at-home mom?” is off limits.)
Finally, lenders can’t examine the racial make-up of your neighborhood when you apply for a mortgage or financing you’ll use for home improvements. This requirement is an effort to stamp out the once common practice of “redlining” — a type of lending discrimination that robbed Black and other minority families of the chance to use government-backed mortgages for decades.
Thanks to the ECOA, lenders must keep you in the loop regarding credit decisions. So, if you apply for financing and the lender denies your application, it has to tell you why.
A lender must provide you with key details when it takes “adverse action” against you. (Adverse action means that a lender denied your application.)
Adverse action notice requirements include the following:
The ECOA also kicks in when a lender offers you something known as an “adverse approval.” An adverse approval happens when a lender offers you less favorable terms than advertised.
Less favorable financing terms could mean that the lender offers you a:
If you reject the less favorable terms a lender offers you, the lender has to explain why it offered you those alternative terms in the first place.
Another situation where the ECOA can protect you is when a lender negatively alters the terms of your account. If this happens to you, you have the right to ask why.
For example, if a credit card issuer lowers your credit limit or closes your account, the ECOA requires the company to explain what happened if you ask. But there is an exception to this rule. ECOA protections won’t cover you here if you didn’t repay the creditor according to the terms of your agreement (or if the account is inactive).
Credit score developers, like FICO and VantageScore, also pay attention to the Equal Credit Opportunity Act. Why? Because the ECOA affects their customers (aka the lenders and financial institutions that purchase credit scores).
In order for a lender to use a credit scoring system to evaluate the creditworthiness of applicants, it must meet the fair lending standards that the ECOA sets.
Before any lender can use a credit score for risk evaluation, the score needs to follow two rules. A credit score (used for lending purposes) must be:
What these complicated terms mean is that credit scoring models have to use a scientific process when they evaluate the credit history of a potential borrower. Additionally, there must be proof that a credit score works like it’s supposed to work before a lender can use it to examine applicants.
FICO and VantageScores both predict the likelihood that a consumer will pay a credit obligation 90 days late (or worse) during the upcoming 24-month period. Translation: Credit scores tell lenders how likely you are to pay a credit obligation late in the next two years.
Prior to the formation of the Consumer Financial Protection Bureau (CFPB), the Federal Reserve Board was the government agency that wrote the rules that implemented the ECOA with lenders. The rules helped lenders understand how to follow the ECOA and make sure their lending practices weren’t discriminatory.
In 2011, the job of enforcing the ECOA passed to a new government agency — the CFPB. The CFPB both writes the rules to implement the ECOA and regulates lenders to make sure they obey the law.
A few other federal agencies are also involved in the job of supervising lenders for ECOA compliance, including the:
When a lending institution violates the ECOA, it could face consequences at the hands of any of the three following federal enforcement agencies:
Thanks to the Equal Credit Opportunity Act, you have the right to take action if you believe a lender is discriminating against you. There are several remedies available when you feel you’re a victim of credit discrimination.
Michelle Black is a leading credit expert, author, writer, and speaker with over a decade and a half of experience in the credit industry. She is an expert in credit reporting, credit scoring, financing (mortgages, credit cards, loans), debt eradication, budgeting, saving, and identity theft. She is featured monthly at credit seminars, podcasts, and in print. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).
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