What is the Equal Credit Opportunity Act?
ECOA prohibits credit discrimination on the basis of race, color, national origin, sex, marital status, age, or as a result of a person receiving public assistance in whole or in part. It also prohibits action against anyone who has exercised any rights under the Consumer Credit Protection Act.
It further states that when determining a consumer’s creditworthiness, financial institutions instead consider the following: income, expenses, debts, and credit history. ECOA permits creditors to ask for certain information to help in the documentation process. But even that is limited by certain rules.
This Act applies not just when credit is denied, but also applies if a consumer gets less favorable borrowing terms like a higher interest rate. ECOA shields borrowers in activities before, during, and after the extension of credit.
When Was ECOA Passed?
ECOA was passed in 1974 by the house of Representatives by a vote of 282-94. It then moved to the Senate, which passed an amended version 89-0. Thereafter, the House approved the amended version 355-1 and the bill was signed into law by President Gerald Ford on Oct 10, 1974.
Formerly, the Federal Reserve Board was in charge. However, that role was transferred to the Consumer Financial Protection Bureau, which was created in 2011 as part of the Dodd-Frank Act.
However, that piece of legislation has been rolled back in 2018 after Donald Trump promised to “do a number on Dodd-Frank”. Congress accepted and passed the Economic Growth, Regulatory Relief, and Consumer Protection Act on May 22, 2018.
This dealt largely with banking regulations, though, and the proponent is of the opinion that it should not adversely impact the agency’s role when it comes to ECOA guidelines.
Equal Credit Opportunity Act (ECOA) Requirements
ECOA states that creditors are to:
- Offer the applicant a note of action. Taken within 30 calendar days of receiving the application. Except certain exception applies. Note, that these notes of action taken are sometimes to be in writing. While in other cases, oral notification satisfies the requirement.
- Creditors are to offer specific reason(s). Or allow the candidate to know how to get the reason(s) why they are denied credit. Or granted credit in a way that differs from the terms under which they originally applied. Also, the same rule applies in a situation where a creditor closes the account. Also when a creditor refuses to increase a line of credit. It makes a negative change in the terms of the credit. And does not make the same change for other consumers. Where the creditor refuses to give credit at the same. Or approximately the same, terms as were offered when the credit was initially applied for.
Equal Credit Opportunity Act (ECOA) Penalties
Organizations who are discovered to have violated the ECOA could potentially face class-action lawsuits by the Department of Justice (DOJ). This lawsuit will be carried if the DOJ or any affiliate agencies recognize a pattern of discrimination.
On the other hand, the Consumer Financial Protection Bureau (CFPB) seeks to enforce ECOA with other federal agencies, like the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA). If any organization is found guilty, they may have to pay out punitive damages which can be significant, and cover any costs incurred by the person who is wronged.
ECOA was passed to protect women and minorities from being discriminated against by credit card companies.