What is the 'Equal Credit Opportunity Act - ECOA'

A regulation created by the U.S. government that aims to give all legal individuals an equal opportunity to apply for loans from financial institutions and other loan granting organizations. The Equal Credit Opportunity Act (ECOA) states that individuals cannot be discriminated upon via factors that are not directly related to their creditworthiness. It prohibits creditors and lenders from considering a consumer’s race, color, national origin, sex, religion or marital status in deciding whether to approve their loan or credit application. Financial institutions also cannot deny credit based on age, as long as the applicant is of legal age and has the mental capacity to enter into a contract, nor can they deny credit because the applicant is receiving public assistance.

BREAKING DOWN 'Equal Credit Opportunity Act - ECOA'

When you apply for a mortgage, the lender will ask you about some of these facts under federal requirements that are supposed to help prevent discrimination, but you are not required to respond. The only accepted factors that can be used to determine whether or not an individual is acceptable for a loan are relevant financially related information such as one's credit score, income and existing debt load.

Another aspect of the ECOA allows each spouse in a marriage to have his or her own credit history in his or her own name. That being said, if you have any joint accounts with your spouse, these accounts will appear on both of your credit reports, so your spouse’s financial behavior can still have a positive or negative impact on your credit score.

While the ECOA prohibits lenders from basing their decisions on your marital status, some loans, such as mortgages, might require you to disclose that you are making required alimony or child support payments. And if you receive child support or alimony and it represents a significant source of your income, you might need to disclose it in order to qualify for a loan. You could be denied a loan if, for example, your child support payments combined with your other financial obligations mean that you don’t have enough money to repay the loan as required. You cannot be denied a loan simply because you are divorced, though.

Organizations found in violation of this act could potentially face class-action suits. If found guilty, the offending organization could have to pay out punitive damages totaling up the lesser of $500,000 or 1% of the creditor's net worth.

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