Equal Credit Opportunity Act Nondiscrimination Requirements
Dear Boards of Directors and Chief Executive Officers:
The Equal Credit Opportunity Act (ECOA) promotes the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract); to the fact that all or part of the applicant’s income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. 1 ECOA prohibits creditor practices that discriminate on the basis of any of these factors. The National Credit Union Administration (NCUA) supervises for compliance with and enforces ECOA with respect to federal credit unions that have $10 billion or less in total assets. 2 Additionally, ECOA requires the NCUA to refer certain violations to the U.S. Department of Justice (DOJ). 3
The NCUA is committed to ensuring that all consumers have access to safe, fair, and affordable credit granted in compliance with applicable consumer protections and other requirements. The NCUA has prepared this letter to summarize general nondiscrimination requirements and signal fair lending risk areas related to marital status, age, income consideration, redlining, and indirect lending. 4
Discriminatory Credit Practices Defined
ECOA prohibits discrimination in any aspect of a credit transaction. It applies to any extension of credit, including extensions of credit to small businesses, corporations, partnerships, and trusts. Under ECOA, a lender may not, because of a prohibited factor:
- Fail to provide information or services or provide different information or services about any aspect of the lending process, including credit availability, application procedures, or lending standards;
- Discourage or selectively encourage applicants with respect to inquiries about or applications for credit;
- Refuse to extend credit or use different standards in determining whether to extend credit;
- Vary the terms of credit offered, including the amount, interest rate, duration, or type of loan;
- Use different standards to evaluate collateral;
- Treat a borrower differently in servicing a loan or invoking default remedies; or
- Use different standards for pooling or packaging a loan in the secondary market.
A lender may not express, orally or in writing, a preference based on prohibited factors or indicate that it will treat applicants differently on a prohibited basis. A lender may not discriminate on a prohibited basis because of the characteristics of:
- An applicant, prospective applicant, or borrower;
- A person associated with an applicant, prospective applicant, or borrower (for example, a co-applicant, spouse, business partner, or live-in aide); or
- The present or prospective occupants of either the property to be financed or the characteristics of the neighborhood or other area where property to be financed is located.
Disparate treatment occurs when a lender treats a credit applicant or prospective applicant differently based on one of the prohibited bases defined in ECOA. The existence of illegal disparate treatment may be established either by statements, policies, or guidelines revealing that a lender explicitly considered prohibited factors, or by differences in treatment that are not fully explained by legitimate nondiscriminatory factors. It does not require showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself.
The following are fair lending risk areas that credit unions should be aware of.
Applicant Marital Status
Except as otherwise permitted or required by law, a creditor must evaluate married and unmarried applicants using the same standards. In evaluating joint applicants, a creditor cannot treat applicants differently based on the existence, absence, or likelihood of a marital relationship between the parties. Further, a creditor generally cannot require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if an applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested. If, under a creditor’s standards of creditworthiness, the personal liability of an additional party is necessary to support the credit requested, a creditor may request a cosigner, guarantor, endorser, or similar party. The applicant’s spouse may serve as an additional party, but the creditor cannot require that a spouse be the additional party.
A creditor may consider an applicant’s or joint applicant’s marital status to determine the creditor’s rights and remedies applicable to a particular extension of credit. For example, in a secured transaction that involves real property, a creditor can take into account whether state law gives an applicant’s spouse an interest in the property being offered as collateral. If it does, a creditor may require the spouse’s signature on any instrument necessary under applicable state law to make the property available to satisfy the debt in the event of default. A creditor’s consideration of state property laws that affect creditworthiness (directly or indirectly) does not constitute unlawful discrimination under ECOA.
A common marital status discrimination violation involves risk-based pricing practices. When two applicants or signers are involved in a lending transaction, a lending policy cannot provide for different pricing guidelines based solely on applicants’ or signers’ marital status, in violation of ECOA. For example, when two applicants are involved, a credit union cannot price loans based on the higher of the two applicants’ credit scores when they are married but based on the primary applicant’s credit score when the applicants are unmarried.
Applicant Age
Except as permitted, a creditor cannot take into account an applicant’s age, provided the applicant has the capacity to enter into a binding contract. Age discrimination violations in credit unions typically involve automatic loan approval systems and guidelines. A credit union cannot disqualify a loan applicant for automatic loan approval based on the applicant’s age, provided the applicant is of legal age to enter into a binding contract, even if the credit union subsequently approves the application following a manual review of the application file. Credit unions using automated underwriting systems should ensure the system’s settings comply with ECOA’s requirements and do not result in age discrimination.
In any system of evaluating creditworthiness, a creditor may consider the age of an elderly applicant (age 62 or older) when such age is used to favor the elderly applicant in extending credit.
A creditor may use an applicant’s age as a predictive variable if the age of an elderly applicant is not assigned a negative factor or value and the creditor is using an empirically derived, demonstrably and statistically sound, credit-scoring system. To qualify as an empirically derived, demonstrably and statistically sound, credit-scoring system, the system must be: 5
- Based on data derived from an empirical comparison of sample groups or the population of creditworthy and non-creditworthy applicants who applied for credit within a reasonable preceding period of time;
- Developed for the purpose of evaluating the creditworthiness of applicants with respect to the legitimate business interests of the creditor using the system (including, but not limited to, minimizing bad debt losses and operating expenses in accordance with the creditor’s business judgment);
- Developed and validated using accepted statistical principles and methodology; and
- Revalidated periodically by the use of appropriate statistical principles and methodology and adjusted as necessary to maintain predictive ability.
In a judgmental system of evaluating creditworthiness (one that does not meet the definition of an empirically derived, demonstrably and statistically sound, credit-scoring system), a creditor cannot decide whether to extend credit or set the terms and conditions of credit based on age or information related exclusively to age. A creditor may consider age or age-related information only for the purpose of evaluating other pertinent elements of creditworthiness that are drawn from the particular facts and circumstances concerning the applicant. For example, while a creditor cannot reject an application or terminate an account because an applicant is 60 years old, a creditor may consider the applicant’s occupation and length of time to retirement to determine whether the applicant’s income (including retirement income) will support the extension of credit to its maturity.
Income Consideration
Creditors may not discount or exclude from consideration the income of an applicant or the spouse of an applicant because of a prohibited basis or because the income is derived from part-time employment or is an annuity, pension, or other retirement benefit. 6 For example, creditors are not permitted to treat women on maternity leave as though they are unemployed for underwriting purposes. Similarly, creditors must consider public assistance and retirement income fully in the underwriting process. However, a creditor may consider the amount and probable continuance of any income in evaluating an applicant’s creditworthiness.
Redlining
“Redlining,” as defined by DOJ, is an illegal practice in which lenders avoid providing services to individuals living in communities of color because of the race or national origin of the people who live in those communities. Credit unions, especially those with fields of membership defined by, or partially defined by, geography, such as community charters and underserved areas, must ensure they provide equal access to credit in the areas defined by their fields of membership. Reviews to determine if a credit union is providing equal access to credit can include statistical analyses of the credit union’s lending within its service area(s), analyses of service locations and placement of mortgage loan officers, and analyses of marketing and advertising.
Indirect Lending
Credit unions with indirect lending programs use various methods to compensate automobile dealers for loan transactions. For example, some credit unions compensate dealers in their networks using a flat fee or flat percentage per transaction. Some credit unions allow dealers to establish their own compensation by increasing the interest rate above the credit union “buy rate” on a discretionary basis, within an established limit. 7 Some credit unions may use a combination of flat fees, flat percentages, and discretionary markups.
Discretionary markups allow a dealer to affect the cost of financing on an individual and discretionary basis. For this reason, the use of discretionary markups presents fair lending risks not usually associated with flat fee or flat percentage compensation structures. Credit unions that permit discretionary markups should ensure their fair lending compliance management systems are sufficiently robust to enable the credit union to measure and address prohibited basis pricing disparities.
For more information on managing compliance risks, see NCUA Letter to Credit Unions, 17-CU-02, Risk-Focused Examinations and Compliance Risk. For information on fair lending risk factors, including compliance program risk factors and overt indicators of discrimination, see the Interagency Fair Lending Examination Procedures.
If you have any questions about federal fair lending regulations, please contact the NCUA’s Office of Consumer Financial Protection at ComplianceMail@ncua.gov.
Todd M. Harper
Chairman
Equal Credit Opportunity Act (ECOA), 15 U.S. Code § 1691
The Equal Credit Opportunity Act (the “ECOA,” 15 U.S.C. §§ 1691-1691f, as amended) prohibits discrimination in credit transactions on the basis of race, color, religion, national origin, sex, marital status, age, receipt of public benefits (such as Social Security), or because a person exercises his or her rights under a consumer protection statute. ECOA applies to both the original extension of credit and to actions taken after the credit is extended, such as the termination of an account. If a creditor violates ECOA, a consumer may be entitled to actual damages and punitive damages up to $10,000. In addition, ECOA contains a “fee-shifting” provision which may require the defendant to pay the plaintiff’s attorney fees and court costs.
Whether you’re applying for credit cards, personal loans, home mortgages, auto financing or any other type of credit, you should know that creditors cannot not discriminate against you. The following list outlines items that creditors are NOT allowed to consider when deciding whether to grant or deny you credit!
- Discrimination is not allowed
- Credit Laws that Apply
- Creditors look for specific creditworthiness indicators
- Creditors cannot use this information
- Special credit application rules
- Credit discrimination against women
- What to do if your credit application has been turned down
If you think you are dealing with or have dealt with a creditor that has illegally denied you credit, find out if you are entitled to cash compensation and other relief.
1. Discrimination
Creditors are not allowed to discriminate against you on the basis of:
- Race;
- Color;
- Religion;
- National origin;
- Sex;
- Marital status;
- Age (provided you have the capacity to enter into a binding contract);
- All or part of your income derives from any public assistance program;
- You have, in good faith, exercised any right under the Consumer Protection Act.
2. What credit laws apply?
ECOA applies to any entity which regularly extends credit, such as a bank, mortgage lender, or finance company. It also applies to an individual or entity which regularly arranges for the extension of credit, such as a mortgage broker or car dealership. The law also applies when a lender or broker takes an application for credit and makes a decision as to whether or not to extend credit to the applicant. ECOA requires that all credit applicants be considered on the basis of their actual qualifications for credit and not be turned away because of certain personal characteristics. If you think a creditor violated your rights under this federal law when granting or denying your credit application contact us today.
3. What do creditors look for on credit applications
They look for the ability to repay debt and a willingness to do so, and sometimes for a little extra security to protect their loans, they speak of the three C’s of credit . . . Capacity, Character, and Collateral.
Capacity. Creditors want to know if you can repay the debt so they ask for:
- Employment information
- Occupation and how long you’ve worked,
- How much you earn.
- Monthly Expenses
- Number of dependents
- Whether you pay alimony or child support, and
- Amount of other obligations.
Character To see if you will you repay the debt, creditors will look at:
- Credit history: see Credit Reports
- How much you owe;
- How often you borrow
- Whether you pay bills on time, and
- Whether you live within your means.
They also look for signs of stability: how long you’ve lived at your present address, whether you own or rent, and length of your present employment.
Collateral. Is the creditor fully protected if you fail to repay? Creditors want to know what you may have that could be used to back up or secure your loan, and what sources you have for repaying debt other than income, such as savings, investments, or property.
Creditors use different combinations of these facts in reaching their decisions. Some set unusually high standards and other simply do not make certain kinds of loans.
Creditors also use different kinds of rating systems. Some rely strictly on their own instinct and experience. Others use a “credit-scoring” or statistical system to predict whether you’re a good credit risk.
They assign a certain number of points to each of the various characteristics that have proved to be reliable signs that a borrower will repay. Then, they rate you on this scale.
And so, different creditors may reach different conclusions based on the same set of facts. One may find you an acceptable risk, while another may deny you a loan.
4. Information the Creditor Cannot Use
The Equal Credit Opportunity Act does not guarantee that you will get credit. You must still pass the creditor’s tests of creditworthiness.
But the creditor must apply these tests fairly, impartially, and without discriminating against you. Also, if you exercise your rights under Federal credit laws such as filing a billing error notice with a creditor, the creditor may not use this as grounds to:
- Discourage you from applying for a loan;
- Refuse you a loan if you qualify; or
- Lend you money on terms different from those granted another person with similar income, expenses, credit history, and collateral.
5. Special Credit Rules
Age. In the past, many older persons have complained about being denied credit just because they were over a certain age. Or when they retired, they often found their credit suddenly cut off or reduced.
So the law is very specific about how a person’s age may be used in credit decisions. A creditor may ask your age, but if you’re old enough to sign a binding contract (usually 18 or 21 years old depending on state law), a creditor may not:
- Turn you down or offer you less credit just because of your age;
- Ignore your retirement income in rating your application;
- Close your credit account or require you to reapply for it just because you reach a certain age or retire; or
- Deny you credit or close your account because credit life insurance or other credit-related insurance is not available to persons your age.
- Creditors may “score” your age in a credit scoring system, but, if you are 62 or older you must be given at least as many points for age as any person under 62.
Because individuals’ financial situations can change at different ages, the law lets creditors consider certain information related to age–such as how long until you retire or how long your income will continue.
An older applicant might not qualify for a large loan with a 5 percent down payment on a risky venture, but might qualify for a smaller loan–with a bigger down payment–secured by good collateral.
Remember that while declining income may be a handicap if you are older, you can usually offer a solid credit history to your advantage. The creditor has to look at all the facts and apply the usual standards of creditworthiness to your particular situation.
Public Assistance. You may not be denied credit just because you receive Social Security or public assistance (such as Aid to Families with Dependent Children).
But–as is the case with age–certain information related to this source of income could clearly affect creditworthiness. So, a creditor may consider such things as:
- How old your dependents are (because you may lose benefits when they reach a certain age); or
- Whether you will continue to meet the residency requirements for receiving benefits.
This information helps the creditor determine the likelihood that your public assistance income will continue.
Housing Loans. The Equal Credit Opportunity Act covers your application for a mortgage or home improvement loan.
It bans discrimination because of such characteristics as your race, color, gender, or because of the race or national origin of the people in the neighborhood where you live or want to buy your home.
Nor may creditors use any appraisal of the value of the property that considers the race of the people in the neighborhood.
In addition, you are entitled to receive a copy of an appraisal report that you paid for in connection with an application for credit, if a you make a written request for the report.
6. Discrimination Against Men and Women is Prohibited
Both men and women are protected from discrimination based on gender or marital status. But many of the law’s provisions were designed to stop particular abuses that generally made if difficult for women to get credit.
For example, the idea that single women ignore their debts when they marry, or that a woman’s income “doesn’t count” because she’ll leave work to have children, now is unlawful in credit transactions.
The general rule is that you may not be denied credit just because you are a woman, or just because you are married, single, widowed, divorced, or separated. Here are some important protections:
Gender and Marital Status. Usually, creditors may not ask your gender on an application form (one exception is on a loan to buy or build a home).
You do not have to use Miss, Mrs., or Ms. with your name on a credit application. But, in some cases, a creditor may ask whether you are married, unmarried, or separated (unmarried includes single, divorced, and widowed).
Child-bearing Plans. Creditors may not ask about your birth control practices or whether you plan to have children, and they may not assume anything about those plans.
Income: Child Support & Alimony. The creditor must count all of your income, even income from part-time employment. Child support and alimony payments are a primary source of income for many women. You don’t have to disclose these kinds of income, but if you do creditors must count them.
Telephones. Creditors may not consider whether you have a telephone listing in your name because this would discriminate against many married women. (You may be asked if there’s a telephone in your home.)
A creditor may consider whether income is steady and reliable, so be prepared to show that you can count on uninterrupted income–particularly if the source is alimony payments or part-time wages.
Your Own Accounts. Many married women used to be turned down when they asked for credit in their own name. Or, a husband had to cosign an account–agree to pay if the wife didn’t–even when a woman’s own income could easily repay the loan.
Single women couldn’t get loans because they were thought to be somehow less reliable than other applicants. You now have a right to your own credit, based on your own credit records and earnings. Your own credit means a separate account or loan in your own name–not a joint account with your husband or a duplicate card on his account.
Here are the rules:
Creditors may not refuse to open an account just because of your gender or marital status.
You can choose to use your first name and maiden name (Mary Smith); your first name and husband’s last name (Mary Jones); or a combined last name (Mary Smith-Jones).
If you’re creditworthy, a creditor may not ask your husband to cosign your account, with certain exceptions when property rights are involved.
Creditors may not ask for information about your husband or ex-husband when you apply for your own credit based on your own income–unless that income is alimony, child support, or separate maintenance payments from your spouse or former spouse.
This last rule, of course, does not apply if your husband is going to use your account or be responsible for paying your debts on the account, or if you live in a community property state. (Community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.)
Change in Marital Status. Married women have sometimes faced severe hardships when cut off from credit after their husbands died. Single women have had accounts closed when they married, and married women have had accounts closed after a divorce.
The law says that creditors may not make you reapply for credit just because you marry or become widowed or divorced. Nor may they close your account or change the terms of your account on these grounds. There must be some sign that your creditworthiness has changed. For example, creditors may ask you to reapply if you relied on your ex-husband’s income to get credit in the first place.
Setting up your own account protects you by giving you your own history of how you handle debt, to rely on if your financial situation changes because you are widowed or divorced. If you’re getting married and plan to take your husband’s surname, write to your creditors and tell them if you want to keep a separate account.
7. If You’re Turned Down for Credit
Remember, your gender or race may not be used to discourage you from applying for a loan. And creditors may not hold up or otherwise delay your application on those grounds.
Under the Equal Credit Opportunity Act, you must be notified within 30 days after your application has been completed whether your loan has been approved or not. If credit is denied, this notice must be in writing and it must explain the specific reasons why you were denied credit or tell you of your right to ask for an explanation. You have the same rights if an account you have had is closed.
If you are denied credit, be sure to find out why. Remember, you may have to ask the creditors for this explanation. It may be that the creditor thinks you have requested more money than you can repay on your income. It may be that you have not been employed or lived long enough in the community. You can discuss terms with the creditor and ways to improve your creditworthiness.
If you think you have been discriminated against, cite the law to the lender. If the lender still says no without a satisfactory explanation, you may contact a Federal enforcement agency for assistance or to bring legal action.
https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/equal-credit-opportunity-act-nondiscrimination-requirementshttps://www.fair-debt-collection.com/practice-areas/credit-laws/equal-credit-opportunity-act/
