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?
References for the Equal Credit Opportunity Act
Equal Credit Opportunity Act (ECOA)
- ● Credit scoring and the equal credit opportunity act, Hsia, D. C. (1978). Hastings LJ, 30, 371. This paper analyses the impact and controversies surrounding the political and legal role in credit scoring. Emphasis is placed on the discrimination against federally protected classes of citizens.
- ● The Equal Credit Opportunity Act and the Effects Test, Baer, M. K. (1978). Banking LJ, 95, 241. This paper analyses the effect of the credit scoring amendment act. The main objective is to show the limitations of this amendment act.
- ● Foreclosure fallout: The banking industry’s attack on disparate impact race discrimination claims under the fair housing act and the equal credit opportunity act, Aleo, M., & Svirsky, P. (2008). BU Pub. Int. LJ, 18, 1. This paper explores the differences between interest rates demanded from white, African American, and Latin American borrowers. This article aims to show the racist activity of lenders on African American and Latin American borrowers.
- ● Equal credit opportunity: women and mortgage credit, Ladd, H. F. (1982). The American Economic Review, 72(2), 166-170. This paper explores the enactment of ECOA (equal credit opportunity act), in response to arguments that federal legislation was necessary to correct discriminatory treatment of women by the credit industry. This paper aims to show how well mortgage lenders have complied with the sex and marital provisions of ECOA.
- ● The equal credit opportunity act: An evaluation, Nevin, J. R., & Churchill Jr, G. A. (1979). The Journal of Marketing, 95-104. This article conducts an empirical analysis of the equal credit opportunity act and its effects on the consumer credit industry.
- ● The Equal Credit Opportunity Act and Regulation B, Maltz, E. M., & Miller, F. H. (1978). Okla. L. Rev., 31, 1. This paper examines the functions and the reason for the creation of the Equal Credit Opportunity Act (ECOA) by the Council in 1974.
- ● The Equal Credit Opportunity Act: A Functional Failure, Matheson, J. H. (1984). Harv. J. on Legis., 21, 371. This paper explores the failures and shortcomings of the Equal Credit Opportunity Act (ECOA).
- ● A Fresh Look at the Equal Credit Opportunity Act, Reizenstein, G. R. (1980). Akron L. Rev., 14, 215. This study shows the difficulties faced by women in obtaining different credit loans and mortgages despite the enactment of the Equal Credit Opportunity Act. Results however shows that women have better credit scores than men.
- ● A survey of credit and behavioural scoring: forecasting financial risk of lending to consumers, Thomas, L. C. (2000). International journal of forecasting, 16(2), 149-172. This article surveys the techniques used — both statistical and operational research based — to calculate the credit scoring and behavioural scoring of individuals who apply for organizational loans.
- ● The Equal Credit Opportunity Act: The Effect of the Regulations on the Poor, Baker, B., & Taubman, E. (1975). Clearinghouse Rev., 9, 543. This paper aims to show the impact of the ECOA on the average/poor citizens.
- ● Defending a Free Standing Equal Credit Opportunity Act Claim, Thomas, C. E. (1997). Banking LJ, 114, 108. In this paper, the author suggests various approaches to the defense of claims brought by prospective borrowers under the ECOA.