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The Equal Credit Opportunity Act and How It Protects Borrowers

Updated Sep 09, 2021 | Published May 10, 20215 min read

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At a glance

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.

What Is 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.

The Fair Credit Reporting Act and the Fair Credit Billing Act are two other important amendments to the CCPA that can protect you.

Your Rights Under the ECOA

Protected Classes

Under the ECOA, lenders are not allowed to discriminate against you for any of the following reasons:

  • Race
  • Religion
  • Color
  • Sex or Gender
  • National Origin
  • Age
  • Marital Status
  • Receipt of income from a public assistance program

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.

Limitations on Certain Information

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:

  • You’re applying for a joint loan, a joint credit card, or another form of joint financing with your spouse. (In other words, your spouse is a cosigner on your application.)
  • You wish to add your spouse as an authorized user on your account.
  • Your spouse is the joint owner of the collateral you’re using to secure a loan.
  • You reside in a community property state such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.
  • Any portion of the applicant’s income you choose to include on your loan application comes from your spouse (or former spouse in the case of child support or alimony).

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.

Notice of Credit Decisions

Adverse Action

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:

  • Within 30 days or less, a lender must let you know whether it will approve or deny your credit application.
  • If a lender denies your application, it has to explain why or, at the very least, inform you that you have the right to request the specific reasons behind your loan denial for 60 days.
  • Details about the credit bureau (or credit bureaus) from which the lender purchased your credit report.
  • A notice of your right to dispute inaccurate items on your credit report.
  • The credit score the lender reviewed when you applied for financing (if applicable).
  • Details about your credit score range (if the lender reviewed it), and the reasons why your score isn’t higher. (Only the top four or five reasons are included.)

Adverse Approval

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:

  • Higher interest rate
  • Smaller loan amount
  • Shorter repayment period

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.

Negative Alterations to Account Terms

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 Scoring System Rules

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:

  1. Empirically derived
  2. Demonstrably and statistically sound

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.

Who Enforces the ECOA?

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:

  • National Credit Union Administration
  • Federal Reserve Board
  • Office of the Comptroller of the Currency
  • Federal Deposit Insurance Corporation

When a lending institution violates the ECOA, it could face consequences at the hands of any of the three following federal enforcement agencies:

  • Consumer Financial Protection Bureau
  • Federal Trade Commission
  • Department of Justice

What Can You Do If You Experience Lender Discrimination?

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.

  1. Talk to the creditor. You might be able to convince a lender to reconsider your application if you feel like one of its employees discriminated against you.
  2. Contact the CFPB. You can submit a complaint to the CFPB online.
  3. Contact your state attorney general. Although this office doesn’t enforce the ECOA, you can submit a complaint if you believe the lender violated any state equal credit opportunity laws.
  4. Seek advice from an attorney. Attorneys who specialize in consumer protection laws can answer your questions and might be able to represent you if you wish to file a lawsuit. If you sue a financial institution and win your case, the court may award you punitive damages, actual damages, and reasonable attorney’s fees.
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Written by

Michelle Lambright Black

Michelle Lambright 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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