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Discrimination can happen on many fronts, including personal finance. Fortunately, the U.S. government has taken measures over the years to protect citizens from being discriminated against when it comes to financing.One of those is the Equal Credit Opportunity Act (ECOA), a law that protects consumers against unfair lending practices, like discrimination based on sex, race, and religion. The ECOA comes into play when you apply for credit cards and various loans. Here’s what you need to know.
What Is the Equal Credit Opportunity Act (ECOA)?
The Equal Credit Opportunity Act (ECOA) is a civil rights law that prevents lenders from discriminating against credit card or loan applicants based on factors unrelated to their ability to repay. The ECOA was passed in 1974, with the initial goal of preventing discrimination in financing based on sex or marital status. Two years later, the act was expanded to include discrimination based on race, color, religion, age, or being in receipt of public assistance.Lenders and financial institutions must follow the ECOA for many different types of financing, including personal loans, auto loans, mortgages, student loans, credit cards (including credit cards for bad credit), and small business loans.
What Is the Purpose of the ECOA?
The purpose of the ECOA is to provide protections to consumers like you when dealing with businesses that extend credit, including banks, small loan and finance companies, and retail stores. This creates an equal playing field for all consumers when it comes to getting access to lending products. Lenders must only look at neutral criteria, such as credit history, income, and existing debts, to determine an applicant’s qualifications for a credit card or loan. In other words, a lender can’t reject an applicant for an auto loan because of their race or charge them more interest because of their gender.Recommended: Best Credit Cards for Good Credit
What Is Covered Under the ECOA?
Under ECOA regulation, lenders cannot take the following factors into consideration when reviewing someone’s application for a credit card or loan:
Race
Color
Religion
National origin (the country where you or your ancestors were born)
Sex (including gender, sexual orientation, and gender identity)
Marital status
Age (beyond minimum age requirements, such as being 18 or older)
Participation in a public assistance program (such as the Supplemental Nutrition Assistance Program, aka SNAP, or Social Security Disability Insurance, or SSDI)
In addition, lenders can't do or say anything that would discourage someone from applying for a loan or credit card based on the factors listed above.
What Did the ECOA Do?
Before the passage of the ECOA in 1974, many banks would not grant credit cards to women without their husband’s signature and often outrightly refused to give them to unmarried women.While the ECOA was initially aimed to help women get financial aid when they needed it, it quickly became apparent that women weren’t the only ones being discriminated against in the lending world. In 1976, the act expanded to include discrimination based on other factors, such as race, color, or religion.And, in March 2021, the Consumer Financial Protection Bureau (CFPB) clarified that the ECOA’s prohibition against sex discrimination includes discrimination against sexual orientation and gender identity, along with a person’s nonconformity with sex-based or gender-based stereotypes.
Who Does the ECOA Apply To?
The Equal Credit Opportunity Act applies to all creditors. This includes financial institutions and other firms involved in extending credit, including banks, small loan and finance companies, retail and department stores, credit card companies, credit unions, and real estate brokers who arrange financing.In addition, the ECOA is not limited to consumer loans — it also applies to any loans or credit extended to small businesses, corporations, partnerships, and trusts.
Equal Credit Opportunity Rights
The Equal Credit Opportunity Act requires lenders to use only relevant criteria when determining eligibility for loans and credit cards, including:
Credit score
Credit history
Income
Existing debt
In addition, once you’ve given a creditor the above information, along with a completed application, the creditor has 30 days in which to let you know whether you are approved or denied. If you are denied, they must provide the reason or inform you that you have the right to inquire why you were denied within 60 days.Also under the ECOA, you have the right to know which credit bureau(s) the lender pulled your credit report(s) from. The lender must also notify you of your right to dispute inaccurate information on your credit report. Under the ECOA, creditors also cannot:
Impose different terms or conditions — such as a higher interest rate or higher fees — based on your race, color, religion, national origin, sex, marital status, age, or whether you receive public assistance.
Refuse to consider reliable public assistance in the same way as other income.
Ask about your marital status if you’re applying for a separate, unsecured account.
Ask if you’re widowed or divorced.
Consider the racial composition of the neighborhood where you want to buy, refinance, or improve a house with money you are borrowing.
ECOA Penalties
Lenders take the ECOA pretty seriously, as they should. In addition, the CFPB, along with other federal agencies, including the Federal Deposit Insurance Corporation (FDIC), supervise banks and lending companies to make sure they follow the law.Lenders found in violation of ECOA can face class-action lawsuits from the Department of Justice (DOJ) if the DOJ or any affiliate agencies recognize a pattern of discrimination. If found guilty, the lender could be forced to pay out punitive damages that can be significant and cover any costs incurred by the wronged party.
Limitations on Certain Information
As mentioned above, lenders are not allowed to ask you about your marital status (or any information about your spouse) in most cases. However, there are some exceptions to this rule. These include:
You’re applying for a joint loan or credit card.
You want to add your spouse as an authorized user on your account.
Your spouse is the joint owner of the collateral you’re using to secure a loan.
You reside in a community property state such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.
Any information you include on your loan application comes from your spouse (or former spouse in the case of child support or alimony)
Also, while a lender cannot consider your race, sex, or national origin in making a credit decision, they can ask you to disclose this information if you want to (it helps federal agencies enforce anti-discrimination laws). A creditor is also allowed to consider your immigration status and whether you will be able to stay in the country long enough to repay the debt.Recommended: Best Fair Credit Cards
Examples of ECOA Enforcement
There have been numerous cases over the years in which the ECOA has been enforced. Here are just two examples:
In 2015, the CFPB found that American Honda Finance Corporation’s pricing policies resulted in thousands of African-American, Hispanic, and Asian and Pacific Islander borrowers paying higher interest rates for their car loans because of their race and national origin. Honda Finance was ordered to pay $24 million in relief to all the borrowers who were overcharged.
In January 2017, a $53 million settlement was made against JP Morgan Chase for lending discrimination based on race and national origin. The DOJ found that the bank's brokers charged higher interest rates to Black, Indigenous, and People of Color than they did white borrowers before and during the 2008 financial crisis.
Other Laws That Protect Borrowers
The Equal Credit Opportunity Act is one of several laws designed to protect consumers like you.There is also the Fair Credit Reporting Act, which regulates the way credit bureaus can collect, access, use, and share information they collect about you and keep in your consumer reports. The credit bureaus must:
Make sure that the information they collect about you is accurate
Give you a free copy of your report once every 12 months (as a result of the pandemic, however, all three credit reporting bureaus are allowing free weekly reports through 2022)
Give you a chance to fix any mistake
And, thanks to the Truth in Lending Act, lenders must publish and disclose credit terms in a way that consumers can easily understand them, and that makes it easy to compare credit terms from one lender to another.
The Takeaway
The ECOA is designed to protect you. Thanks to this federal law, a lender cannot take your race, color, religion, national origin, gender, marital status, age, or fact that you receive public assistance into account when deciding whether to approve you for a credit card or loan. If you feel you have been unfairly denied credit, you can file a complaint with the Consumer Financial Protection Bureau.
Finding the Credit Card That's Right for You
It’s great to know that your credit application can’t be rejected for any reason other than your creditworthiness. But what if you don’t have much credit history or you’ve had problems with credit in the past? A card that helps you build credit could be a good solution. With Lantern by SoFi, you can quickly compare credit building credit card offers from multiple issuers in our network.
Frequently Asked Questions
What did the Equal Credit Opportunity Act do?
What is covered under ECOA?
Who does ECOA apply to?
Photo credit: iStock/Lyndon Stratford
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About the Author
Susan Guillory
Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
