Key Takeaways
- ECOA prohibits discrimination in any aspect of a credit transaction based on 9 protected classes: race, color, religion, national origin, sex, marital status, age, receipt of public assistance, and exercise of TILA rights
- Creditors must notify applicants of action taken on their application within 30 days, including specific reasons for denial or adverse action
- The Spouse Signature Rule prohibits requiring a spouse's signature if the applicant qualifies independently
- Creditors cannot inquire about childbearing plans, marital status (in most cases), or receipt of alimony unless the applicant relies on it for qualification
- ECOA applies to ALL creditors, not just mortgage lenders, and covers business credit as well as consumer credit
- Regulation B implements ECOA and is enforced by the CFPB along with various federal agencies
ECOA (Equal Credit Opportunity Act)
The Equal Credit Opportunity Act (ECOA) is a federal law enacted in 1974 to ensure all consumers have an equal chance to obtain credit. ECOA is implemented by Regulation B, issued by the CFPB.
Purpose and Scope
ECOA was designed to:
- Prohibit credit discrimination based on protected characteristics
- Ensure fair lending practices by all creditors
- Require notification of actions taken on credit applications
- Provide remedies for victims of credit discrimination
Broad Coverage
Unlike some laws that focus on specific industries, ECOA applies to:
| Covered | Specifically Includes |
|---|---|
| ALL creditors | Banks, credit unions, finance companies |
| ALL credit transactions | Mortgages, credit cards, auto loans, personal loans |
| Business AND consumer credit | Commercial and consumer lending |
| Any person who arranges credit | Mortgage brokers, loan officers |
The 9 Protected Classes
ECOA prohibits discrimination based on these prohibited bases:
| Protected Class | Examples |
|---|---|
| Race | Any racial group |
| Color | Skin color |
| Religion | Any religious belief or practice |
| National origin | Country of birth, ancestry, ethnicity |
| Sex | Male, female, non-binary, gender identity |
| Marital status | Single, married, separated, divorced, widowed |
| Age | Any age (if applicant can legally contract) |
| Receipt of public assistance | TANF, Social Security, SSI, food stamps |
| Exercise of TILA rights | Cannot retaliate against borrowers who exercise consumer rights |
Age Discrimination Nuances
Age can be considered in limited circumstances:
- Can consider age to evaluate a pertinent element of creditworthiness (e.g., length of employment, time until retirement)
- Cannot use age to assign negative value or deny credit based solely on age
- Can use a credit scoring system that considers age if empirically derived and demonstrably sound
Types of Discrimination
Discrimination under ECOA can occur in several forms:
Overt Discrimination
Openly refusing credit or treating applicants differently based on a prohibited basis.
Examples:
- "We don't make loans to people from that country"
- Offering different terms based on race
- Refusing to lend to single women
Disparate Treatment
Treating similarly situated applicants differently based on a prohibited basis.
Examples:
- Requiring additional documentation from minority applicants
- Offering better rates to married couples than single applicants
- More rigorous verification for public assistance recipients
Disparate Impact
Neutral policies that disproportionately affect protected groups without business justification.
Examples:
- Minimum loan amounts that exclude minority neighborhoods
- Credit policies that disproportionately deny older applicants
- Income requirements that disproportionately affect protected groups
Application Process Rules
What Creditors CANNOT Ask
| Prohibited Inquiries | Exception |
|---|---|
| Plans to have children | Never permitted |
| Birth control practices | Never permitted |
| Marital status | May ask in community property states OR if applicant relies on spouse's income |
| Race, national origin, sex | Only for monitoring purposes on dwelling-secured loans |
| Income from alimony/child support | May ask IF applicant voluntarily discloses as income source |
What Creditors CAN Ask
| Permitted Inquiries | Purpose |
|---|---|
| Number of dependents | Relates to expenses and obligations |
| Age | If legal to contract; to evaluate creditworthiness elements |
| Immigration status | If affects ability to enforce contract |
| Race, sex, ethnicity | For HMDA monitoring (dwelling-secured only) |
| Alimony/child support received | If applicant relies on it for qualification |
Monitoring Information (HMDA Data)
For dwelling-secured loans, creditors must request (but cannot require):
- Race or national origin
- Sex
- Ethnicity
If applicant declines to provide, creditor must note based on visual observation or surname.
The Spouse Signature Rule
One of ECOA's most important protections is the Spouse Signature Rule:
General Rule
A creditor shall NOT require the signature of an applicant's spouse or other person if the applicant:
- Qualifies under the creditor's standards based on their own income and credit
- Has sufficient collateral in their own name
When Spouse Signature IS Permitted
| Situation | Spouse Signature Allowed |
|---|---|
| Community property state | For unsecured credit, if relying on community property |
| State law requires | If necessary to create a valid lien |
| Applicant relies on spouse's income | If needed to qualify |
| Joint credit | Both applicants requested joint credit |
Important Distinction
- Creditor can require spouse to SIGN property documents (quitclaim, subordination)
- Creditor CANNOT require spouse to be OBLIGATED on the debt unless they meet the above exceptions
Adverse Action Notice Requirements
When a creditor takes adverse action, they must provide written notification:
What Is Adverse Action?
| Adverse Action | NOT Adverse Action |
|---|---|
| Denial of credit | Withdrawal by applicant |
| Counteroffer not accepted | Approved as requested |
| Refusal to increase credit line | Denial of increase when not requested |
| Change in terms on existing account | Routine account review |
Timing Requirements
| Situation | Notification Deadline |
|---|---|
| Complete application | Within 30 days of receiving |
| Incomplete application | Within 30 days of receiving, or after reasonable time for completion |
| Counteroffer | Within 30 days of learning applicant declined |
Required Content
The adverse action notice must include:
- Statement of action taken (denial, counteroffer, etc.)
- Specific reasons for the action OR notice of right to request reasons
- ECOA notice - Statement that discrimination is illegal
- Agency information - Name and address of enforcement agency
- Credit score disclosure - If score was used, provide score and key factors
Specific Reasons Requirement
Creditors must provide specific reasons (not vague statements):
| Acceptable | NOT Acceptable |
|---|---|
| "Insufficient income for loan amount" | "You did not meet our credit standards" |
| "Excessive outstanding obligations" | "Your application was not approved" |
| "Unable to verify employment" | "Various factors were considered" |
| "Delinquent credit obligations" | "Better luck next time" |
Record Retention Requirements
Creditors must retain records for ECOA compliance:
| Record Type | Retention Period |
|---|---|
| Applications (approved or denied) | 25 months |
| Written complaints | 25 months |
| Self-tests | 25 months minimum |
| Prescreened solicitations | 25 months |
Enforcement and Remedies
Enforcement Agencies
Multiple federal agencies enforce ECOA depending on the creditor type:
- CFPB - Most non-bank mortgage lenders
- OCC - National banks
- Federal Reserve - State member banks
- FDIC - State non-member banks
- DOJ - Pattern or practice discrimination
Private Remedies
Victims of discrimination can sue for:
| Remedy | Amount |
|---|---|
| Actual damages | Compensatory damages for losses |
| Punitive damages | Up to $10,000 (individual) |
| Class action punitive | Up to $500,000 or 1% of net worth |
| Attorney's fees | Reasonable fees and costs |
| Equitable relief | Injunctions, credit correction |
Statute of Limitations
- 5 years from date of violation for ECOA claims
Key Takeaways
- ECOA prohibits discrimination based on 9 protected classes in any credit transaction
- The Spouse Signature Rule protects applicants who qualify independently
- Adverse action notices must be provided within 30 days with specific reasons
- Creditors cannot inquire about childbearing plans or require disclosure of alimony unless relied upon
- HMDA data collection (race, sex, ethnicity) is required for dwelling-secured loans
- Discrimination can be overt, disparate treatment, or disparate impact
Under ECOA, which of the following is a creditor permitted to ask during the application process?
A married woman applies for a mortgage and qualifies based on her own income and credit. The lender requires her husband to co-sign the loan. This action is:
Within how many days must a creditor provide an adverse action notice after receiving a completed credit application?