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What is the Equal Credit Opportunity Act?
The Equal Credit Opportunity Act is a federal law that prohibits lenders from using a consumer’s race, color, national origin, gender, religion, or marital status as a factor for a loan approval. Lenders may look only at financially relevant information such as income, credit score, and debt load when making a decision about a loan. This gives all consumers an equal opportunity to apply for mortgages, automobile and personal loans, and credit cards.
The ECOA includes important provisions that pertain to women and couples. It states that each spouse in a marriage may have individual credit accounts and credit histories, but if the couple have any joint accounts, those accounts appear on both credit reports. The law has specific guidelines for lenders to follow from application review to servicing the loan.
Consumers applying for loans must provide specific information to the lender to help determine whether they qualify for the loan. Although some do inquire about race, gender, national origin, and marital status, they report this information only to the federal agencies that enforce anti-discrimination laws. Consumers are not required to answer these questions. Other restrictions include the following:
- Lenders may not charge someone higher interest rates or impose higher fees because of the individual’s national origin, marital status, age, or income from public assistance.
- Lenders may not ask whether the borrower is widowed or divorced. The only acceptable options are married, unmarried, or separated.
- Lenders may not ask for information about a borrower’s spouse unless the spouse is a co-applicant, the borrower lives in a community property state, or the borrower plans to use the spouse’s income to qualify for the loan.
- Lenders may not ask whether borrowers receive alimony or child support payments. They may ask whether borrowers pay these payments.
Equal Credit Opportunity Act example
Lenders evaluate income as part of the loan approval process to make sure the borrower has sufficient income to repay the loan. Under the ECOA, however, the lender may not refuse to include public assistance, alimony, or child support as income as long as the borrower can prove the payments are reliable and consistent. The law also requires that lenders consider all forms of income equally, including income that comes from part-time employment, Social Security, pensions, or annuities.
Although lenders may not use non-financial factors to approve or deny a loan, they may consider age or immigration status. This means that they cannot deny a loan based only on age as long as the borrower is old enough to sign a contract. They can, however, consider whether an applicant nearing retirement age faces a significant drop in income that will make it difficult for the borrower to make timely payments. Similarly, the lender may look at the borrower’s immigration status to determine whether or not he has the resources to pay back the loan. For example, borrowers who do not have the legal right to work in the country may lack reliable income to cover payments.
The ECOA gives specific rights to consumers regarding their credit. Consumers have the right to know the specific reason a lender denies an application, offers less favorable terms than initially discussed, or closes an active and up-to-date account. This gives women additional rights, including having credit listed in a birth name, keeping their own accounts after changing their name, getting married or divorced, or reaching a certain age. They even have the ability to seek a co-signer other than their spouse.
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