What is the Equal Credit Opportunity Act?

You may or may not be familiar with the Equal Credit Opportunity Act (ECOA), but it’s something that comes into play when you want to borrow money. It’s a civil rights law to prevent credit and loan applicants from being discriminated against on the basis of race, religion, gender and other factors. 

Read on to learn more about ECOA, its purpose and how it protects people’s credit rights.

Key takeaways

• ECOA protects credit applicants from discrimination.
• Under ECOA, lenders can only use information related to creditworthiness to evaluate a borrower’s credit application or to set loan terms.
• ECOA applies to any financial institution or company extending credit, including banks, credit unions and retail stores.
• Both businesses and individuals are protected under ECOA.

The purpose of ECOA is to regulate and enforce fair lending practices. It prohibits lenders from discriminating against credit and loan applicants. 

ECOA was introduced in Congress to prevent discrimination based on sex or marital status, and it passed in 1974. Before it became a law, lenders might have taken into account whether women were single or of childbearing age, for example. In 1976, Congress amended the law to protect more groups, prohibiting discrimination based on race, religion, age and other factors.

ECOA covers the credit activities of individuals, trusts and companies, including small businesses, partnerships and corporations. The law applies to banks, credit unions, finance companies and retail stores—generally any business or institution extending credit or setting credit terms. 

Numerous types of credit and loans are subject to the rules of ECOA including credit cards, mortgages, lines of credit, personal loans, auto loans, student loans and loan modifications.

Equal Credit Opportunity Act and the Fair Housing Act

Like ECOA, the Fair Housing Act (FHA) protects people from some discriminatory banking activities. However, while ECOA focuses on credit transactions, the FHA focuses on discrimination in housing and real estate transactions.

Under ECOA, lenders can only use criteria related to an applicant’s creditworthiness—or ability to repay the loan—when it comes to things like making credit decisions and extending credit to borrowers. So lenders can look at credit scores, credit history, income and current debt.

But creditors can’t do things like charge higher fees, inflate interest rates, change other loan terms or deny a loan or a credit application based on these factors:

• Race
• Religion
• Color
• National origin or ethnicity
• Sex, including gender and sexual orientation
• Marital status
• Age, beyond when someone is legally allowed to apply for a loan
• Whether someone is receiving aid from a public assistance program, such as Social Security Disability Insurance 
• If a person is exercising consumer protection rights

Lenders may ask questions about these characteristics on a credit application or in a credit interview in order to help enforce ECOA and other anti-discrimination laws. However, they can’t use the answers as criteria in any credit decisions or to treat borrowers differently. And answering the questions is optional for borrowers. 

There’s some related information that lenders can use to make credit decisions, though. For instance, a mortgage lender can ask a potential borrower whether their income includes alimony from a former spouse. But being divorced can’t factor into any credit decisions.

ECOA was initially enforced by the Federal Reserve Board. The Dodd-Frank Act of 2010 transferred ECOA authority to the Consumer Financial Protection Bureau (CFPB). That means the CFPB writes the regulations and ensures financial institutions like banks and credit unions adhere to them. The CFPB does this by reviewing consumer complaints and financial institutions’ records, as well as interviewing lenders’ employees. 

Other government agencies help the CFPB. And if authorities find that a financial institution has violated the law, they may involve the U.S. Department of Justice and the Federal Trade Commission (FTC).

According to ECOA, creditors must give potential borrowers written notice that their completed application was rejected or accepted within 30 days of receiving it. 

If the application is rejected, the creditor will give the applicant an adverse action notice explaining the reasons why. If they don’t offer any reason, the creditor is required to tell the denied borrower that they have 60 days to request the reason.

ECOA also has a Valuations Rule where lenders must notify a borrower of their right to receive copies of any appraisals and valuations—and provide a free copy after they’re completed.

Why a credit application may be rejected

When lenders evaluate credit risk for a loan, they might review the following things:

• Credit reports: If a lender denies your loan because of derogatory marks on a credit report, they’re required to disclose that to you and give you the contact information for the particular credit bureau that reported the information. Under the Fair Credit Reporting Act (FCRA), you have the right to access your credit file. And it’s a good idea to regularly monitor your credit reports for accuracy.
• Debt-to-income ratio: A high debt-to-income (DTI) ratio could indicate to lenders that you may have a hard time making payments.
• Credit scores: A lender may have a minimum credit score range they’ll consider before granting a loan. 
• Income: A lender may evaluate your income to see if it meets the minimum requirements for the amount of the loan you’re seeking.

Keep in mind, a lot goes into lending decisions, and each lender typically has different criteria.

If you're applying for a loan, it can be helpful to be aware of some of the signs of possible credit discrimination. They might include being given a higher interest rate than what you qualify for or not receiving a reason for being denied a loan.

If you suspect a financial institution has discriminated against you or someone else in violation of ECOA, you can start by contacting the lender to see if a resolution is possible. 

Additional options include:

• Contacting the attorney general’s office in your state to see if any state laws have been broken.
• Submitting a complaint to the CFPB. You can also check the status of a complaint already made by contacting the CFPB. 
• Submitting a complaint to the Office of the Comptroller of the Currency.

The CFPB and FTC have more information about actions you could take.

Whether you’re applying for a credit card or a loan—or even just thinking about it—it’s a good idea to know your rights under ECOA. It’s also helpful to know what information creditors use to review credit applications and what to do if you suspect a violation has occurred.

Looking for ways to make your credit application stronger? Learn how to improve your credit score.