'Equal Credit Opportunity Act (ECOA)' is explained in detail and with examples in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
The Equal Credit Opportunity Act is also known as the ECOA. Congress created this regulation in order to provide all legal American residents with a fair and reasonable opportunity to obtain loans from banks or other financial institutions that make loans.
The act clearly states that such organizations may not discriminate against individual people for any reason that does not directly pertain to their credit history and file. It makes it illegal for lenders and creditors alike to take into consideration such factors as the consumer’s color, race, ethnicity, nation of origin, religion, sex, or marital status when they are determining whether or not they will accept the credit or loan application.
Besides this, the law prohibits denying any credit application because of the age of the applicant. This assumes that the person applying has attained the legal minimum age and demonstrates the mental abilities necessary to execute such a contract. Finally, companies making loans may not reject an applicant because he or she receives public assistance funds from the government.
The governmental agency responsible for enforcing this Equal Credit Opportunity Act turns out to be the FTC Federal Trade Commission. As the consumer protection agency for the country, the FTC monitors lending organizations to make sure that they are not in violation of any of these discriminatory rules. Creditors are allowed to ask applicants for such information as their color, race, religion, sex, ethnicity, nation of origin, age, or marital status.
They are not allowed to consider any of these factors when determining whether or not to extend credit or even when deciding the terms of the credit which they are offering. The fact remains that not all people applying for credit will receive it or will obtain it on equal terms. Many factors are taken into consideration by lenders in ascertaining a person’s creditworthiness, such as expenses, income, credit history, and levels of debts.
This Equal Credit Opportunity Act specifically protects consumers when they transact with investors or organizations that routinely offer credit. This includes loan and finance companies, banks, department or retail stores, credit unions, and credit card companies. Every party who is a part of the credit granting or terms setting decisions has to abide by the rules of the ECOA. This includes even the finance arrangers such as real estate brokers.
As a person applies for a mortgage, lenders will routinely inquire about some of the elements of information that are forbidden to be considered in the ultimate application decision. Because of this, applicants do not have to respond to these questions. The only considerations which they are allowed to employ in judging the merits of the individual must be information that is financially relevant, like the person’s income, credit score, and present debt levels.
The Equal Credit Opportunity Act will not allow lenders to make approval decisions because of an individual’s present or past marital status. They will require that applicants inform them of any child support or alimony payments which they are making. Persons receiving such substantial payments as part of their income should also disclose this so that they can obtain the loan. Companies may refuse to provide a loan because the individual’s financial obligations along with child support payments are too high to pay back the loan under the required terms. This does not mean that a person can be turned down for a loan because he or she is or has been divorced.
The penalties for violating the Equal Credit Opportunity Act are severe. Class action lawsuits can be brought against them. Organizations found guilty of ignoring this act can be made to pay damages that amount to either $500,000 or a percent of the applicant’s net worth, whichever is less.