What Is the Equal Credit Opportunity Act?

Whether you’re getting a mortgage, taking out a car loan, or financing your education, the ability to access credit is hugely important.

You likely already know that having a solid payment history and a good credit score can increase your chances of approval. But did you know that the law also prohibits lenders from unfairly discriminating against credit applicants?

In this article, we’ll answer a key question for anyone applying for credit: What is the Equal Credit Opportunity Act?

What is the Equal Credit Opportunity Act?

The Equal Credit Opportunity Act (ECOA) was passed in 1974 to protect consumers from unfair lending practices. It includes provisions that bar discrimination and ensure consumers’ right to information.

Anti-discrimination provisions

Lenders may assess a person’s creditworthiness and use their findings to determine whether to extend credit. However, the ECOA expressly prohibits lenders from discriminating against applicants based on any of the following characteristics:

• Race
• Color
• Sex
• Religion
• Age
• Marital status
• National origin
• Source of income
• Exercising one’s rights under the Consumer Credit Protection Act (CCPA)

When the law was first passed, “source of income” discrimination only applied to applicants receiving public assistance. Now, creditors must count all regular sources of income, including the following:

• Supplemental Security Income (SSI)
• Supplemental Security Disability Insurance (SSDI)
• Social Security income
• Child support payments
• Alimony/spousal support payments
• Veteran’s benefits
• Pensions and other retirement benefits
• Annuities

Creditors also may not refuse to consider income from part-time jobs.

Right-to-information provisions

While prohibiting discrimination is an important aspect of the law, the ECOA also imposes certain transparency requirements on lenders. Specifically, lenders must inform applicants of their decision within 30 days of the original application.

If the lender denies an application for credit, they must give a specific reason (or tell the consumer how to request the reason) for the denial. Lenders must also provide specific reasons for doing any of the following:

• Refusing to increase a line of credit
• Closing an account
• Lowering credit limits
• Otherwise changing the terms of the credit agreement

Depending on the circumstances, notice may or may not have to be given in writing.

Why the ECOA was created

What is ECOA meant to accomplish, exactly? This law is a cornerstone of consumer rights in America, and it drastically changed the lending landscape for the better.

Before the passage of the ECOA in 1974, it was difficult or impossible for many women to obtain credit. In most cases, banks required women — whether they were single, married, divorced, or widowed — to have a male co-signer for credit.

Because lenders were allowed to discount a woman’s income when evaluating her credit application, even financially independent women were denied credit.

Women weren’t the only ones who struggled to get credit before the ECOA. Many lenders would refuse credit to any non-white applicants, regardless of income. 

“Redlining,” an unfair lending practice that involved using maps to mark minority neighborhoods as “high-risk,” was once commonly used to deny mortgages to people of color. Even the Federal Housing Administration (FHA) openly engaged in redlining.

As you can imagine, this kind of widespread discrimination made it difficult for women and minorities to get ahead in terms of income, business ownership, and homeownership. The ECOA was created to level the playing field and give all Americans a fair chance.

Who enforces the ECOA?

When the ECOA was first signed into law in 1974, the Federal Reserve Board was responsible for implementing and enforcing its provisions. After the Consumer Financial Protection Bureau (CFPB) was formed, it took over.

Depending on what type of creditor commits an alleged violation, the CFPB may work with several other agencies to take action, including the following:

• Federal Deposit Insurance Corporation (FDIC)
• Office of the Comptroller of the Currency (OCC)
• Federal Trade Commission (FTC)
• National Credit Union Administration (NCUA)

If a lender is found to be in violation of the ECOA, it could face multimillion-dollar penalties and federal lawsuits.

What to do if your ECOA rights were violated 

The ECOA allows the CFPB and other organizations to sue discriminatory lenders on behalf of consumers. However, consumers may also take legal action against creditors individually.

If you file a lawsuit against a discriminatory lender and win, you may be able to recover the following types of compensation:

• Actual damages (compensation for losses you’ve suffered)
• Punitive damages (extra compensation intended to punish the lender)
• Reimbursement for attorney’s fees

Lawsuits must be filed within five years of the violation. If you believe you’re being discriminated against, your first priority should be to document as much as you can. The more evidence you have of the discriminatory conduct, the stronger your case will be.

Once you’ve gathered your evidence, consult a consumer protection lawyer as soon as possible. A skilled attorney will be able to review your case and tell you if they think going to court is your best option.

Know your rights as you build your credit

Now you know the answer to the question, “What is the Equal Credit Opportunity Act?” One of the best ways to protect yourself as a consumer is to understand your rights. It’s important to remember that you have options if your ECOA rights have been violated.

If you’re trying to improve your credit score before your next credit application, Kikoff can give you the boost you need.

Kikoff sets you up with a small credit line and reports your payments to all three credit bureaus. The powerful platform also offers rent reporting, debt negotiation, and a variety of other credit-building tools. If you’re ready to get started, open your account today!