Equal Credit Opportunity Act (ECOA): What It Is And Why It’s Important
During the early and mid-20th century, lending products like credit cards and mortgages became increasingly popular. But despite their widespread availability, certain groups of people weren’t able to access these financial products due to discriminatory lending practices.
For instance, married women were forced to use their husbands as co-signers before the bank would sign off on a loan. And unmarried women were often denied loans outright.
And the problem was even worse for minority groups. For a period of time, the FHA used to refuse to insure mortgages in neighborhoods that were primarily black. These actions made anti-discrimination legislation necessary and led to the eventual signing of the Equal Credit Opportunity Act (ECOA).
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What Is ECOA?
The Equal Credit Opportunity Act (ECOA) is a law that prevents credit bureaus from discriminating against individuals, businesses and other entities in credit transactions. The ECOA prohibits discrimination based on race, sex, nationality, religion and other factors. All creditors must follow the ECOA’s guidelines, including mortgage lenders.
Breaking Down The Equal Credit Opportunity Act
The ECOA is a federal law that prevents financial institutions from discriminating against credit applications based on factors that aren’t relevant to a borrower’s ability to repay the loan. The ECOA ensures that all borrowers have fair and equal access to credit.
The ECOA originally passed in 1974 and was written to prevent discrimination based on sex or marital status. The law greatly benefited women but left out other marginalized groups who experienced discrimination in the financial sector.
To remedy this, the law was amended in 1976 to widen the scope of groups protected under the ECOA. Today, it’s illegal for any lender to discriminate against borrowers based on any of the following:
- National origin
- Sex or gender
- Marital status
- Age (assuming 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 documentation showing proof of the alimony agreement.
And you may still be asked to report basic information, including your race, ethnicity, gender or age, when applying for certain types of credit, like 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.
The ECOA also requires that creditors provide denied applicants with the reasoning behind their decision within 60 days. If you believe you’ve been discriminated against, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).
What Is ECOA Regulation B?
Regulation B implements ECOA and provides the framework for how it should be followed and enforced. Basically, it’s the part of the law that puts the regulations into practice.
Regulation B also lays out penalties for creditors who violate the ECOA. If lenders are found liable, they could pay 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.
Rights Provided By The ECOA
Borrowers are entitled to certain protections anytime they’re dealing with a financial institution. Here is a list of rights guaranteed by the ECOA:
- Lenders must provide equal access to credit
- A lender cannot engage in credit discrimination
- Lenders cannot give you different terms or conditions based on factors like race, sex, or religion
- Lenders cannot discourage borrowers from applying
- You have the right to know why a creditor denied your application
- You have the right to know why you received less favorable loan terms
- You can apply with or without a cosigner
- You can choose not to answer questions about your race, ethnicity or gender if you prefer
Restrictions For Creditors
Here are some of the ways the ECOA restricts creditors:
- It limits what creditors can and cannot ask potential borrowers
- The ECOA limits the criteria that can be used to evaluate a credit applicant
- Lenders can only ask for information for the purpose of determining creditworthiness
- Lenders cannot choose to discount certain types of income, like Social Security Disability Insurance
- Your marital status cannot be used against you when evaluating your credit application
- Any questions about your race, ethnicity and gender cannot be used as a reason to approve or deny your credit application
- Creditors have to provide equal information to all borrowers throughout the entire transaction
Considerations For Married Couples
The ECOA also allows married couples to have a credit history in their own names. So if you have any joint accounts with your spouse, they’ll show up on both individuals’ credit reports.
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Factors That Credits Can Legally Consider
Lenders are allowed to consider factors that could affect a borrower’s ability to repay the loan. This includes things like:
- Credit score
- Your income and expenses
- Debt-to-income (DTI) ratio
- Credit history
And depending on the type of credit you’re applying for, lenders can consider other factors as long as they’re 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 62 years old or older and your age can be used in your favor.
Signs Your ECOA Rights Are Being Violated
Here are some signs that could indicate you’re being discriminated against and your ECOA rights are being violated:
- Your lender treats you differently in person that they did over the phone
- A lender discourages you from applying for a certain type of loan
- You’re refused for a loan even though you meet all the requirements
- A lender offers you a loan with a higher rate than you applied for even though you qualified for the lower rate
- You overhear your lender making negative comments about your race, nationality, sex or other protected groups
- You feel pressured to sign a loan agreement
- The lender denies your credit application but won’t explain why or how they came to that decision
What To Do If Discrimination Occurs
If you believe you’ve been discriminated against by a lender, the first step is to file a complaint with that lender. You may be able to convince them to revisit your loan application.
But if that doesn’t work, you can file a complaint with the CFPB. The CFPB uses these complaints to establish patterns of behavior among various financial institutions.
It’s also a good idea to contact an attorney who can advise you on your rights and what your next steps are. You may be able to take that lender to court and if you win, you could receive punitive damages.
What’s covered under the ECOA?
The ECOA protects lenders from discrimination on the basis of race, gender, religion, national origin, marital status and any other factor unrelated to the loan itself. Lenders are only allowed to consider factors that will affect a borrower’s ability to repay the loan.
Who supervises the Equal Credit Opportunity Act?
When the law was originally enacted, the Federal Trade Commission (FTC) was responsible for implementing the regulation. But when the Dodd-Frank Act was passed in 2010, it transferred this authority to the CFPB. The CFPB currently enforces the ECOA for banks, credit unions and savings associations holding more than $10 billion in assets.
What’s the penalty for violating the ECOA?
If a lender is found guilty of violating the ECOA, they can be taken to court and sued for damages. If they’re found liable, they could pay 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.
What’s the difference between the ECOA and Regulation B?
The ECOA is legislation passed by Congress to prevent discrimination in credit and financial transactions. Regulation B is the rule the FTC created to enforce the ECOA. The CFPB is now responsible for enforcing Regulation B.
The Bottom Line
In the past, lack of access to credit prevented certain groups from accumulating wealth through homeownership. The ECOA Act prevents lenders from discriminating against borrowers based on factors unrelated to their ability to repay the loan.
As a borrower, it’s important to know your rights. If you’ve been denied credit, you have a right to know why. And 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’re ready to start the home buying process and learn what mortgage options are available to you, the first step is to get approved for a mortgage. You can speak to one of our Home Loan Experts today to find out what your options are.
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