Equal Credit Opportunity Act (ECOA)

What is the Equal Credit Opportunity Act (ECOA)?

The Equal Credit Opportunity Act (ECOA) is a law that was passed in October 1974 in the United States of America. The law makes it unlawful for creditors to discriminate against any applicant on the basis of race, religion, color, national origin, marital status, sex, or age. In addition, it prohibits discrimination against those who derive their income, in part or fully, from public assistance programs. Failure to comply with the law merits a penalty.

The purpose of the law was to end unfair discrimination, as well as to provide an equal playing field to economically-backward parts of society. The specific law is 15 U.S.C. §1691.

The law defines certain concepts listed below:

• Adverse action
• Non-discrimination
• Civil liability

The abovementioned concepts are essential to the functioning of the law. They are discussed in detail below.

Adverse Action

Adverse action against the applicant is an action by the creditor that negatively affects the borrower. If such an action is based on one of the characteristics listed in the act, it is a violation of the law. ECOA defines what counts as an adverse action as:

• Denying credit or revoking existing credit based on the listed characteristics
• Changing the existing terms of credit in a way that is detrimental to the borrower, e.g., increasing the interest rate if the borrower receives some form of public assistance
• Providing credit that is substantially different in amount and terms sought for by the borrower

The above definition of adverse action does not apply to delinquent applicants. Hence, denying credit to a delinquent borrower is not an adverse action against them.

Non-Discrimination

The Equal Credit Opportunity Act defines special cases that use one of the above characteristics, but are not considered discrimination. The cases are listed below:

• Asking the marital status as a part of the application as long as marital status does not adversely affect the decision
• Asking for age as a part of the application does not count as discrimination
• Asking the applicant the amount of public assistance received by them and how much it contributes to their total income
• Using age as a factor in a statistically sound model for credit risk, as long as it does not discount the elderly
• Using age in the decision-making process only if it is in favor of the applicant

Civil Liability

As stated above, there is a penalty for violating the provisions set down in the ECOA. An applicant can sue a creditor for damages either individually or in a group in a class-action lawsuit. The penalties are defined for each class of lawsuits, as follows:

• Individual: For an individual applicant, the creditor needs to pay any damages, attorney’s fee, and a punitive penalty of $10,000.
• Class action: In a class-action lawsuit, the amount payable is given by the following formula: Minimum of $500,000 or 1% of the net worth of creditor.

All the parts combined form the functioning arm of the ECOA that prohibits unfair discrimination, facilitates credit access, and punishes the violators. At the same time, it is fair to creditors by defining reasonable limits to the use of data and capping the size of the penalty that can be imposed.

Additional Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

• Credit Score Analysis
• Fair Credit Billing Act (FCBA)
• Sarbanes Oxley Act
• Volcker Rule
• See all commercial lending resources