The Equal Credit Opportunity Act or ECOA was passed in 1974 and is detailed in Title 15 of the United States Code. ECOA is a federal regulation that gives everyone an equal opportunity to apply for a loan. The Federal Reserve Board was initially in charge of enforcing the act. In 2011, the Consumer Financial Protection Bureau was created and began enforcing the ECOA.
The ECOA requires financial institutions, such as banks and credit card companies, to make credit equally available to all qualified applicants. This act prohibits discrimination based on someone’s race, color, religion, sex, national origin, or age.
Financial institutions may only use relevant financial information to consider whether or not to approve an individual’s credit application. All other questions that a lender may ask during the application process are optional and should not be used in the approval analysis.
An example is if an applicant is divorced and pays child support or alimony. The individual would disclose these required payments on the loan application. The borrower may be denied a loan because his or her child support or alimony payments, as well as other financial obligations, may result in a higher debt to income ratio. However, a borrower’s application cannot be denied solely on the basis that he or she is divorced.
Regulation B lays out fundamental procedures for fair lending. These series of rules address the actions of a lender before, during, and after a credit transaction to prevent discrimination. For example, Regulation B explains what criteria lenders must use to determine creditworthiness and loan approval.
It also mandates that lenders provide oral or written notice of why an application has been rejected within 30 days of receiving a completed application. The notice must explain why the loan was denied or give instructions on how to request this explanation.
All lenders are required to comply with ECOA’s Regulation B. Failure to comply may result in punitive damages.
In the past, some banks discriminated against women and minorities. For example, women applicants were required to have more collateral, extra cosigners, and sometimes were required to produce the explicit approval of their husband. Lenders often discounted a woman’s income or took steps to discourage them from seeking credit.
Additionally, minority groups, as well as entire neighborhoods (a practice known as “redlining”), were regularly denied home loans.
Financial organizations found in violation of the ECOA could face individual as well as class-action lawsuits. Civil liability may also include punitive damages as well – $10,000 for individual cases and up to $500,000 or 1% of the creditor’s net worth for class action cases.