Equal Credit Opportunity Act: Protection from credit discrimination

By  |  Published: September 22, 2017

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations

Rights under ECOA

Being discriminated against by a lender is unacceptable – and costly.

The federal government’s consumer watchdog announced a settlement of credit discrimination charges with American Express in late August, in which more than 220,000 customers will receive refunds averaging $436 each.

The credit card company notified the regulator that its business practices in Puerto Rico and other U.S. territories resulted in higher rates and inferior terms than customers in the states received.

“Consumers are entitled to equal and fair access to credit,” said Aracely Panameño, director of Latino Affairs at the Center for Responsible Lending. “The agreed compensation that will exceed $96 million will hopefully send a signal to other card issuers that may engage in similar practices.”

The refunds are due under the U.S. Equal Credit Opportunity Act, which protects consumers from discrimination on the basis of race, sex, religion, national origin and marital status. It requires that a lender tell you the reason if you’re turned down for credit. Lenders are free to reject borrowers or charge them higher rates based on their credit history.

WARNING SIGNS
OF CREDIT DISCRIMINATION
The CFPB says to watch for these warning signs of discrimination in the credit process:
  • Getting a different reception in person than on the phone.
  • Overhearing comments about your race or other protected status.
  • Being discouraged from applying, or steered away from a certain type of loan.
  • Being turned down from a loan that you seem to qualify for based on ads.
  • Getting a higher rate than rates you’ve seen the company promoting in ads.
  • If you think you have been discriminated against by a lender, you can file a complaint with the CFPB.
WARNING SIGNS OF CREDIT DISCRIMINATION
The CFPB says to watch for these warning signs of discrimination in the credit process:
  • Getting a different reception in person than on the phone.
  • Overhearing comments about your race or other protected status.
  • Being discouraged from applying, or steered away from a certain type of loan.
  • Being turned down from a loan that you seem to qualify for based on ads.
  • Getting a higher rate than rates you’ve seen the company promoting in ads.
  • If you think you've been discriminated against by a lender, you can file a complaint with the CFPB.

The law’s protections extend beyond the loan application. It prohibits discrimination throughout the credit process, from the rates and fees charged, loan servicing processes, and even during the collection of an unpaid balance.

Discrimination is hard to spot
In many instances, however, lending discrimination may be hard for victims to spot. In addition to prohibiting individual discriminatory treatment – called “disparate treatment” – the law prohibits “disparate impact.” That’s when protected groups get a worse deal than others as a result of company policies that are not discriminatory on their surface. 

“No individual consumer can tell if they’re being discriminated against on a disparate impact claim,” said Stuart Rossman, litigation director at the National Consumer Law Center. “You’d have to know not only what you’re getting, but what everyone else is getting as well.”

For example, in the American Express case, the credit card giant found different regional policies and different communications for Spanish speakers resulted in those customers getting inferior deals than others. In a statement about its legal settlement with the CFPB, American Express denied that the company actively discriminated against groups of customers.

Protecting yourself from credit discrimination
Given that the discriminatory policies affected large groups of people, individuals in the affected groups were unaware they were getting a worse deal than others in far away areas. 

“It makes it very challenging for them,” Panameño said. “Not to mention the fact that many people don’t like to talk about their credit – it’s not part of your casual conversation.”

While it may be next to impossible for an individual to determine they are a victim of disparate impact discrimination, there are ways to protect yourself from disparate treatment – discrimination at the individual level.

Spotting group discrimination may be difficult, but recent enforcement actions suggest that some company policies are problem areas to be aware of:

  • Spanish language communications channels.
    AmEx and another credit card issuer, GE Capital, now called Synchrony, offered Spanish-speaking customers inferior credit terms because of differences in the offers provided through the channel for Spanish-speaking customers, according to the CFPB. GE Capital offered less beneficial loan settlement policies to Spanish speakers than the deals given through its regular, English communications channel, the agency’s enforcement action said.

  • Dealership auto financing.
    Loan markup policies at auto financing companies have been the focus of two major CFPB enforcement actions in recent years, at American Honda Finance Corp. and Ally Bank/Ally Financial, formerly General Motors Acceptance Corp. The crackdowns resulted in $104 million in compensation to African-American, Hispanic, Asian and Pacific Island borrowers.
“No individual consumer can tell if they’re being discriminated against on a disparate impact claim. You’d have to know not only what you’re getting, but what everyone else is getting as well.”

Legal background
One July day in Massachusetts, Lucas Rosa went to Park West Bank & Trust Co. to apply for a loan, wearing a blouse, skirt and stockings. The loan officer asked to see identification, then told Rosa she would have to “go home and change” before getting a loan application. Rosa, who identifies as a woman, was dressed as a man in her ID photos.

At first a federal court dismissed her discrimination lawsuit under the equal credit law, but the federal appeals court disagreed, ruling that Rosa had grounds to sue.

Transgender consumers are among the protected groups under the ECOA, Rossman said. The ECOA was enacted in 1974 originally to prohibit discrimination on the basis of sex and marital status, as denying women credit was a common practice by lenders. Amendments by Congress and judicial interpretations in case law have extended the law’s protections.

The law is a sister to the Equal Employment Opportunity Act and the Fair Housing Act. Because jobs, credit and housing were seen as vitally important, Congress built high standards for protection into these areas, Rossman said. Companies must show that if their policies do result in disparate treatment of protected groups, there is a critical business need for the policy.

How equal credit is enforced
There are several avenues, including:

  • Self-reporting by companies.
    The ECOA exempts companies from penalties – beyond refunds paid to affected consumers – if they recognize and report disparate impact discrimination. In the American Express case, the company reported the equal credit violation to the consumer bureau and did not face a civil penalty, which is common in many CFPB crackdowns of legal violations.

  • Regulatory action.
    The CFPB and banking agencies share enforcement duties of the ECOA, along with the U.S. Justice Department. Under the Dodd-Frank Consumer Protection and Wall Street Reform Act, the CFPB is the only U.S. agency whose primary mission is to protect consumers of financial services. As part of its supervisory role, the agency sends examiners to monitor the practices of large banks and other financial industry players.

  • Civil lawsuits.
    Under the ECOA, individuals can bring their own claims under the law, with penalties of up to $10,000 in addition to a refund of the higher costs they experienced. Groups of consumers joining in class-action lawsuits may also collect refunds and impose penalties on companies.

    For example, class actions have targeted auto lenders’ loan markup policies that resulted in higher rates for minority borrowers. In 2003, Nissan’s financing arm agreed to pay compensation and offer no-markup loans to African-American borrowers, who paid higher rates than white car buyers with similar credit profiles.

Civil lawsuits have become difficult or impossible to pursue, Rossman said, because of the widespread use of mandatory arbitration, a legal shield from class-action suits that has become built into many financing contracts. Mandatory arbitration requirements, which have become common in loan contracts, prohibit customers from pursuing claims in court and joining class actions.

“I can’t bring those cases today,” said Rossman, who participated in equal credit claims against auto financing companies.

Lenders’ shields from class-action lawsuits means oversight by regulators – and vigilance by individual consumers – is even more important for stopping credit discrimination.

See related: How to file a complaint about a credit card issuerCredit and consumer rights


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Updated: 10-21-2017

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