Throughout the early and mid-20th century, credit products from credit cards to mortgages became increasingly popular. But despite their widespread availability, many consumers weren’t able to access these financial tools, not due to past risky use of credit or any other financial factors, but because of who they were.
Before regulations were introduced to put a stop to credit discrimination, married women had to bring their husbands with them as co-signers before the bank would issue them a credit card, while unmarried women could be outright refused a card.
Minorities, particularly people of color, often had it worse. For decades, it was common practice for mortgage lenders to deny mortgages to African Americans. In fact, prior to anti-discrimination legislation, the FHA used to refuse to insure mortgages in majority-black neighborhoods.
Enter the Equal Credit Opportunity Act, signed into law in 1974.
What Is The ECOA?
The Equal Credit Opportunity Act is the law that prevents financial institutions from discriminating against credit applicants based on factors that aren’t relevant to their ability to repay. The purpose of this law is to ensure that all individuals are given a fair and equal opportunity to receive credit from lenders.
When ECOA was first passed in 1974, it was originally written to prevent discrimination on the basis of sex or marital status, greatly benefitting women but leaving out all the other marginalized groups who experienced discrimination in the financial sector.
To remedy this, the law was amended in 1976 to widen the scope of who would be protected by ECOA. Today, it’s illegal for any lender, whether it be a mortgage lender, credit card company, student loan lender or any other type of creditor, to discriminate against borrowers based on any of the following:
- National origin
- Sex or gender
- Marital status
- Age (provided the borrower is legally able to enter a contract)
- The fact that the borrower receives income from a public assistance program
- The fact that the borrower has exercised their rights under certain consumer protection laws
Lenders may still ask you questions related to some of these things, but only if they’re relevant to the loan. For example, if you’re divorced and plan on using alimony to qualify for a mortgage, your lender may ask you to provide your divorce decree or any documentation that shows proof of the alimony agreement.
Additionally, you may still be asked to report some of this basic information, including your race, ethnicity, gender or age, when applying for certain types of credit, such as a mortgage. Mortgage lenders are required to report basic data about the borrowers they serve so that government regulators can ensure that the lender isn’t engaging in discriminatory practices.
ECOA requires that creditors provide denied applicants with the reason their application was denied within 60 days. If you believe you’ve been discriminated against, you can file a complaint with the Consumer Financial Protection Bureau and speak to a lawyer about suing the creditor.
What Is ECOA Regulation B?
Regulation B implements ECOA and provides the framework for how ECOA should be followed and enforced. Basically, it’s the part of the law that puts the regulations into practice.
Regulation B lays out penalties for creditors who violate ECOA: up to $10,000 in individual lawsuits and the lesser of $500,000 or 1% of the creditor’s net worth in class action lawsuits.
How Does The ECOA Limit Creditors?
ECOA limits what creditors can and cannot ask potential borrowers and the criteria that can be used to evaluate a credit applicant.
Any information that a creditor asks you to provide, other than information that is gathered for government monitoring purposes, should be for the purpose of determining your creditworthiness.
For example, when you’re getting a mortgage, a lender will typically ask you about your income to ensure that you have the ability to repay the loan. Lenders must do this because it’s vital to you being able to fulfill the terms of the loan.
However, they can’t choose to discount certain types of income, such as income that comes from a public assistance program like Social Security Disability Insurance.
Though your marital status can’t be used to discriminate against you when evaluating your credit application, you may be asked whether you are married if you live in a community property state, and a creditor will ask your spouse to provide their information if you both are co-borrowers on the account. Additionally, if you’re using the income of a spouse or former spouse to qualify, they’ll ask about that as well.
The questions you answer regarding your race, ethnicity and gender when you apply for certain types of credit are specifically for government monitoring purposes and should never be used as a factor in approving or denying you credit. These questions are optional, and you can choose not to answer them if you prefer.
ECOA doesn’t just apply to the factors creditors use to either approve or deny you; it also applies to the entire transaction from beginning to end, including the terms and information you’re given and the process you’re required to go through. For example, creditors can’t provide different, more comprehensive information on their offerings to male applicants than they do to female applicants. They also can’t, for example, have more stringent documentation requirements for minority applicants than they do for non-minorities.
How Can Creditors Make Legal Credit Decisions?
The factors that creditors are allowed to use to determine your creditworthiness are things that have been factually proven to demonstrate an individual’s ability to repay. This largely includes your income and expenses, which make up your debt-to-income ratio, and your credit score and history.
Depending on the type of credit you’re applying for, other factors may be considered as long as they are pertinent to the loan. For example, if you’re near retirement age, a lender may consider how a reduction in income due to retirement would affect your ability to repay a loan. Or, a lender may consider your age if you are age 62 or older and your age can be used in your favor.
Summary: Know Your Rights
If you’ve been denied credit, you have a right to know why. If you believe you’ve been discriminated against, file a complaint with the CFPB and speak with an attorney to explore any legal remedies available to you.
If you have questions about what mortgage options are available to you, you can speak with one of our Home Loan Experts today.