What Is the Equal Credit Opportunity Act (ECOA)?

The Equal Credit Opportunity Act (ECOA) is a regulation created by the U.S. government that aims to give all legal individuals an equal opportunity to obtain loans from financial institutions and other loan granting organizations.

Key Takeaways

  • The Equal Credit Opportunity Act (ECOA), under Title 15 of the U.S. Code, is intended to prohibit discrimination by creditors when deciding to approve a loan for an individual.
  • The act's purpose is to prevent lenders from using race, color, sex, religion, or other non-creditworthiness factors when evaluating a loan application.
  • Organizations that have shown a pattern of discrimination can have lawsuits brought against them by the Department of Justice.
  • Many agencies seek to enforce ECOA jointly with the Consumer Financial Protection Bureau.

Understanding the Equal Credit Opportunity Act (ECOA)

The Equal Credit Opportunity Act was enacted in 1974 and is detailed in Title 15 of the United States Code. The act states that individuals cannot be discriminated against by 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 credit application. Financial institutions also cannot deny credit based on age nor can they deny credit because the applicant is receiving public assistance.

Special Considerations

When a borrower applies for credit, the lender will ask about some of the personal facts prohibited for use under federal requirements. These questions are not a part of the approval analysis and are only proposed to help prevent discrimination. Thus, they are optional and not required. The only accepted factors that can be used to determine whether or not an individual is approved for a loan are relevant financially related pieces of 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 their own credit history in their own name. That being said, if a borrower has any joint accounts with their spouse, these accounts will appear on both credit reports, so a spouse’s financial behavior can still have a positive or negative impact on an individual borrower’s credit score.

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

Equal Credit Opportunity Act (ECOA) Penalties

Organizations found in violation of the ECOA could potentially face class-action lawsuits by the Department of Justice (DOJ) if the DOJ or any affiliate agencies recognize a pattern of discrimination.

The Consumer Financial Protection Bureau (CFPB) seeks to enforce ECOA with other federal agencies, such as the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA). If found guilty, the offending organization could have to pay out punitive damages that can be significant, as well as cover any costs incurred by the wronged party.

If you believe you have been discriminated against, you can express your belief to the creditor, confer with your state's attorney general's office, file a lawsuit, and report the violation to the appropriate authority that oversees the business of the creditor.