To combat race, background, and religious discrimination on credit transactions, the government enacted the Equal Credit Opportunity Act. The act was created to prevent discrimination in the financial sector.
If borrowers meet a lender’s eligibility requirements they must be approved regardless of the applicant’s background. While lender’s ultimately have the ability to deny an applicant’s loan request, the lender must follow their own standards and inform the prospective borrower why they were denied the request for financing.
Purpose of the Equal Credit Opportunity Act
The main component of the law is that borrowers not be denied financing to anything other than their financial ability to qualify. This includes denials for financing due to age. Regardless of the age of the applicant, if the prospective borrower meets financial and credit guidelines they cannot be denied financing. Furthermore, where a borrower derives their income from is not a valid reason for a lender to deny the loan request. This includes receiving public assistance, living in section 8 housing and other public assistance programs.
There are two federal laws which outlaw lending discrimination including the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).
All lenders must comply with both laws. While lenders have the right to ask questions regarding one’s background they cannot deny someone credit or increase the terms of a borrower’s credit simply because of background. Furthermore, lenders can never ask about a borrower’s religion.
FHA forbids discrimination of any kind as related to:
Loan approvals
Selling or buying real estate
Renting real estate
The acts make it illegal for a lender to:
Exclude considering public assistance income as other income sources.
Exclude considering social security, pensions, annuities, and bonds as income
Exclude considering alimony, child support, or spousal income.
Spouses and the Equal Credit Opportunity Act
The ECOA forbids spouses of a marriage to have their credit rating tied together. This transformed the financial market by making each person be treated as an individual financially rather than as a couple. Each spouse of a marriage is entitled to their own credit report. If spouses share accounts however, both account holders credit will be affected both positively or negatively.
Marital status is not a valid reason why a party can be denied a loan request. The lender however does have the right to use child support or alimony payments in determining a borrower’s overall debt to income ratio. Being divorced also is not a reason why a party would be denied a loan request. Ultimately the main purpose of the ECOA is to put all party’s regardless of race, religion, or background the opportunity to qualify for credit simply based on their credit, income, and debt to income ratio.
