Credit discrimination is the act in which a creditor prevents access to loans, credit cards, mortgages, or other types of financing based on a person’s race, color, sex, national origin, religion, marital status, age, source of income, and other “protected classes.” This practice is illegal, and a creditor cannot prevent access to financing, refuse an application, close an account, or offer less favorable terms to an individual with the same qualifications.
Many women are more susceptible to experiencing credit discrimination. This is mainly because women who are married, separated, divorced, or widowed may not have credit histories in their own names. They could have either lost their credit histories when they changed their names or had joint accounts where credit was reported in their husband’s name only.
Some examples of credit discrimination may include:
- Refusal to approve a loan, credit card, or other financing programs even though the applicant qualifies for it
- Offering terms with higher rates or less favorable terms even though the applicant qualifies for a lower rate
- Discouraging someone from applying for credit because of a protected class
- Denying an application without providing a reason why
What is the Equal Credit Opportunity Act (ECOA)?
The Equal Credit Opportunity Act (ECOA) is a federal law that prohibits credit discrimination. Although a creditor may ask an applicant for certain demographic information, they cannot use it in their decisions to approve credit or determine an interest rate and their terms. Creditors can consider factors such as income, expenses, debt liabilities, and history of repayment to evaluate creditworthiness.
The ECOA act provides protection to borrowers and covers any organization that participates in deciding whether to approve credit such as banks, small lending companies, retail stores, credit card companies, credit unions, real estate or mortgage brokers, and others.
Credit Discrimination Has Harmed Women and Minority-Owned Businesses
The Consumer Financial Protection Bureau (CFPB) raised concerns that women and minority-owned small businesses have had difficulty obtaining access to credit. This prompted the CFPB to begin conducting audits on creditors to evaluate possible patterns of discrimination against women and minority business loan applicants.
The CFPB’s focus on small business fair lending is supported by the Dodd-Frank Wall Street Reform Act (Dodd-Frank) amendment to the Equal Credit Opportunity Act (ECOA), which requires lenders to report small business lending data to the CFPB.
Despite these regulations, women and minority-owned businesses are still experiencing credit discrimination. There was a recent class-action lawsuit filed by a non-profit organization, the NOLC, Inc., alleging that the U.S. Small Business Administration (SBA) failed to protect women and minority-owned businesses as well as rural-community small businesses from financial distress caused by the COVID-19 pandemic. The lawsuit alleges that such businesses were never allowed to apply for Paycheck Protection (PPP) loans before the federal money ran out.
The PPP program was the SBA’s main tool to help businesses stay afloat, yet critics have noted that it is failing to provide aid to women and minority-owned businesses. The CFPB has been working with the SBA to both prevent and enforce anti-discrimination laws such as the ECOA.
How You Can Protect Yourself from Credit Discrimination
- Complain to the Creditor: Often, when a complaint is filed directly with the creditor that denied the application, they could reconsider your application and conduct another review.
- Report Violations to a Government Agency: There are several federal agencies, such as The Federal Trade Commission (FTC), the CFPB, or HelpWithMyBank.gov, that handle credit discrimination complaints. To report a possible violation, you would need to provide the appropriate agency with the name and address of the creditor, as well as detailed information on why you believe you were discriminated against.
- Contact Your State Office of Attorney General: You can file a consumer complaint directly with your state’s Office of Attorney General, and they will determine whether the creditor violated any state equal opportunity laws.
- Consult with an Attorney: An attorney that specializes in credit discrimination matters can advise you as to whether you should file a lawsuit against the creditor and how to proceed.
Key Takeaways
The ECOA makes it illegal for a creditor to discriminate in any credit transaction involving members of a protected class, such as women and minorities. Credit discrimination is not only illegal but prevents borrowers from obtaining the financing needed to attend college, open or maintain a business, purchase a home, or other activity needed to build a better future for themselves.
Though most regulatory agencies have focused mainly on consumer lending and home financing, shifts have been made toward small business in wake of the COVID-19 pandemic. If you are a member of a protected class, it is important to understand federal laws like the ECOA when applying for credit and take the appropriate action to protect yourself from discrimination if needed.
Sources:
- Patrice Alexander Ficklin, G. (2020, April 27). The importance of fair and equitable access to credit for minority and women-owned businesses. Retrieved August 20, 2020, from https://www.consumerfinance.gov/about-us/blog/fair-equitable-access-credit-minority-women-owned-businesses/
- Class Action Alleges ‘Vast Majority’ of Minority-, Woman-Owned Businesses Shut Out of Paycheck Protection Program. (n.d.). Retrieved August 21, 2020, from https://www.classaction.org/blog/class-action-alleges-vast-majority-of-minority-woman-owned-businesses-shut-out-of-paycheck-protection-program
- Your Equal Credit Opportunity Rights. (2018, March 13). Retrieved August 21, 2020, from https://www.consumer.ftc.gov/articles/0347-your-equal-credit-opportunity-rights
Kelly Giambra
Kelly Giambra is the Founder & CEO of Back Business Solutions, LLC, a business consultation firm that specializes in helping business owners obtain access to affordable financing as well as other working capital solutions. Back Business Solutions, LLC also helps businesses who are facing issues with managing their cash flow and debt liabilities. Kelly has a Master’s Degree in Accounting, an MBA in Finance, and is an inducted member of the Sigma Alpha Pi National Society of Leadership and Success. Kelly is also a licensed real estate salesperson in Western New York. She brings with her over 10 years of experience working in the fields of commercial finance, alternative non-bank business lending, residential mortgages, and default prevention for some of the largest banks as well as private lending firms (including HSBC Bank, PHH Mortgage, Bank of America, M&T Bank, and others).
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