8. What is the “Equal Credit Opportunity Act”?
The Equal Credit Opportunity Act (ECOA) protects individuals from discrimination in lending money or the extension of credit. It covers financial institutions, retail establishments, credit-card issuers, and other credit-granting firms. The ECOA extended the protections from discrimination under Title VII beyond the work environment. It prohibits a lender from discriminating in the extension of credit based upon race, color, religion, national origin, sex, marital status, or age. The ECOA went further to protect against discrimination based upon receipt of public assistance (welfare). Examples of discrimination might include:
• refusing to extend credit;
• discouraging someone from pursuing credit based on a protected characteristics;
• charging a higher rate of interest;
• asking about marital status for a single-borrower loan; and
• asking about children or plans to have children.
The Act imposes special responsibilities on businesses extending credit, as follows:
• issuers must calculate income from all regular sources, such as alimony, maintenance, and part-time jobs;
• issuers must use the credit history for all partners;
• issuers must inform the candidate about the credit decision (granted or denied) within 30 days; and
• consumers must be given a specific reason for denial of credit.
The business must notify the applicant of the reason for a denial of a request to extend credit. Further, the protections extend to any negative action taken pursuant to extending credit.
• Example: A business must notify customers of the reason for a denial of credit, closures of a line of credit, changes to terms of the credit relationship (that is not uniform to all creditors), etc.
Remedies for Violation
The ECOA provides several remedies and penalties for violation of the Act, as follows:
• Private Administrative or Civil Actions – Individuals may bring private causes of action or pursue enforcement through the FTC or CFPB.
• Remedies – Individuals bringing a private cause of action may recover actual damages, punitive damages (up to $10,000), attorneys fees, and legal costs.
• FTC Administrative and Civil Actions – The FTC may also bring an administrative or civil action against the issuer seeking equitable remedies, including injunction against further violations.
• Discussion: How do you feel about the broad anti-discrimination provisions of ECOA? How do you feel about the requirements on businesses that extend credit to customers? Are these too broad or too narrow? Why? Why do you think the ECOA allows for private causes of action and FTC actions for violations?
• Practice Question: Sara is the owner of a small lending firm that makes personal loans. Before lending any money, she collects extensive personal and financial information about the prospective borrower. She uses this information to determine whether to extend credit and at what rate. She focuses on the requirement that any borrower have regular income and a proven ability to repay the funds. What limits are placed on Sara as to the type of information she can record and use in the determination of whether to extend credit?