An overview of what the Equal Credit Opportunity Act is and how It helps prevent inequality in lending
Fortunately, the world is full of diversity. Unfortunately, there are also unjust people in the world. As a borrower, you might be wondering what laws help protect you from discrimination. In the U.S. Code, under Title 15, there is the Equal Credit Opportunity Act, which was passed into law to protect borrowers from being denied a loan based on anything other than their creditworthiness.
In layman’s terms, this act says that lenders cannot consider personal factors when deciding to approve an application. They cannot decide who is approved, or denied, for a loan based on characteristics that have nothing to do with that person’s ability to pay back a loan. The 1974 Equal Credit Opportunity Act requires financial institutions in the United States not to discriminate against applicants on the basis of race, color, religion and more. This act ensures that lending institutions do not discriminate against customers.
Before the Equal Credit Opportunity Act was passed into law in 1974, it was not illegal to decline extensions of credit to someone for any reason. This ultimately led to some lenders discriminating against applicants for reasons outside of their ability to repay a loan. For example, it was not uncommon to deny women simply because they were female.
Initially, the Equal Credit Opportunity Act stated that lending decisions could not be based on gender or marital status. Quickly after, in 1976, Congress amended the original legislature to prohibit discrimination based on race, color, religion, national origin, age, if the applicant was a recipient of public assistance income, and/or exercising one’s rights under certain consumer protection laws as well. Ultimately, providing a much-needed structure of rules for lenders that civil rights activists for economic equality had called for since the 1960’s.
Are there exceptions or considerations to the act?
While lenders are still allowed to ask questions such as an applicant’s age or if they are reliant on public assistance income, they are not allowed to approve or deny based on that information alone. So, do not fret if you have been asked for any of this information when applying for credit in the past. The information is not used in the approval process and is usually taken separately. It is only taken to ensure that these companies are following the Equal Credit Opportunity Act. For the most part, questions like these are optional, and are not generally required.
When applying for a loan or credit, there are three types of relevant financial information used to determine approval or denial. Lenders look at an applicant’s credit score, income level, and current debt(s). That is all the information that creditors are allowed to consider. Ultimately ensuring that the decision is based solely on an applicant’s ability to repay the loan. Customers may not be discriminated against for certain characteristics that are not pertinent to their creditworthiness. However, certain characteristics might indirectly affect a person’s relevant financial information, and by extension, influence the decision of the application.
Although marital status may not be discriminated against, marital status could affect someone’s credit score. For example, if an applicant and their spouse have a joint account, that account will be reflected in their credit score. The act of being single or married has no effect on the application. However, if a person and their spouse have not been making on-time payments to a shared account, that can affect the applicant’s credit score and cause the application to be denied. Here, it is not the marital status that resulted in a denial, rather the financial behavior of the applicant’s spouse.
The same can be said about divorce. Simply being divorced should not sway an application decision. However, if a potential borrower is required to make alimony payments, that information might affect the application. Some loan applications, like mortgages, require alimony information. Alimony is considered a financial requirement. Does the application show that the customer is unable to pay all of their monthly financial requirements? If the application shows that they are unable to pay, then the applicant may be denied.
Although your country of origin is a protected variable in the application process, your immigration status is not. You might be denied a loan if your immigration status does not allow you to stay in the country through the whole loan repayment period. In this case, the creditor has reason to think you will not repay the debt. It is not about being an immigrant. It is about how much longer the borrower is permitted to stay in the country. Will the borrower be legally required to move away within the loan period?
Age can be another tricky variable as it will have some effect on your application status if you are not of legal age. Individuals under the age of 18 will likely not be able to apply for a loan or for credit on their own without a legal guardian or parent. By law, a person under 18 is not old enough to sign a contract and their signature is not legally binding. It is not age discrimination in this situation. It is about whether a signature can be legally enforced or not.
What are loan companies doing in order to comply with the Equal Credit Opportunity Act?
It is not enough to try to comply with the act. Lending institutions need to be continuously striving to remain in compliance with the Equal Credit Opportunity Act.
The act does not just affect the approval or denial step of the application process. The act affects the entire application process. It starts with the loan origination process. Companies that offer mortgages should reassess property standards in minority area neighborhoods. For companies that offer mortgages, the next step is the appraisal process. Check that your appraisers are not acting discriminatory. The next level is marketing. Lenders should be sensitive to the effects of marketing practices. Companies should check that their marketing images are not all of one specific race, age, or sex.
The education process of the loan is also important. Some customers should not be offered information or resources, while others are not. The act also effects the pre-approval process. Lending staff may not try to dissuade a potential customer from even applying, based on that potential customer’s race, color, sex, age, national origin, marital status, religion, or if they receive public assistance. The application terms and agreement cannot be changed either, based on the list of characteristics. Finally, the loan cannot be approved or denied one way or the other based upon those characteristics as well. Loan companies and creditors can only approve or deny a customer’s loan application based solely on the applicant’s creditworthiness.
What to do if you experience discrimination
At Net Pay Advance, we are all about helping people, regardless of who they are or how they look. However, if you suspect that any creditor has ever discriminated against you, there are things that you can do. There are several different companies that might be able to help.
Start with the creditor first. Communicate grievances directly to the creditor and ask for specifics on why your application resulted in a denial. Some creditors might be persuaded to reconsider your application. Alternatively, it may be the case that the company truly feels that they did not discriminate against you. They may believe that their approval or denial of your application was fair. They may refuse to reconsider the application.
You can check in with your state’s Attorney General’s office. Explain what happened in detail. Ask if the creditor’s actions violated the Equal Credit Opportunity Act. They will let you know if any laws were potentially broken. If they find that no laws were broken, they may be able to help explain why you were denied. They may be able to explain why that creditor’s decision was fair.
You can also report violations to appropriate government agencies. It is recommended to contact the Federal Trade Commission (FTC), which enforces the Equal Credit Opportunity Act, and let them know what happened and why you were denied. Other appropriate government agencies include the Consumer Financial Protection Bureau, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the National Credit Union Administration.
If a lender or creditor is found guilty of discriminatory actions, they may be sued. They may be required to pay for damages that the discriminated party faced as a result of the action.
For more information about discrimination provisions, The Business Professor has a video that helps explain.