Debt and Discrimination
While banks and other lenders have the right and responsibility to gauge the financial fitness of any person that applies for a loan, several federal laws prohibit them from engaging in certain discriminatory practices against you or anyone else.
Chief among these laws is the Equal Credit Opportunity Act (ECOA), passed in 1989. It requires that all credit applicants – whether for a credit card, a personal loan, a mortgage, automobile financing or any other type of credit – be considered on the basis of their actual qualifications for credit and not certain personal characteristics.
The ECOA provides basic protections when dealing with any person or business that regularly extends credit, including banks, small loan and finance companies, retail and department stores, credit card companies, and credit unions.
In fact, everyone who participates in the decision to grant credit or in the decision of setting credit terms must comply with the ECOA. This includes real estate brokers who arrange financing for customers or clients.
During the summer of 2017, the American Express credit card company agreed to pay over $95 million to consumers in Puerto Rico, the U.S. Virgin Islands and other U.S. territories for discriminating against consumers in those areas.
The Consumer Financial Protection Bureau imposed the fines on American Express after the company admitted discriminatory practices include charging higher interest rates, imposing stricter credit score cutoffs and providing less debt forgiveness.
Warning Signs of Discrimination by Lenders
Specifically, creditors are not allowed to discriminate against you on the basis of race or color, religion, natural origin, sex, marital status, age or source of income.
Here are a few of the signs of discrimination:
- Denial of credit that you qualify for
- Approved for higher rate than what you applied for and you qualify for the lower rate
- They advise you not to apply for credit without a reason
- You observe different behavior over the phone than in person
- You hear discriminatory language
Race or Color
Lenders are prohibited from asking a person’s race or ethnicity on a credit application, but it may be disclosed voluntarily for the sole purpose of monitoring mortgage applications. It cannot be used by a lender to make a credit decision.
Lenders cannot discourage you from applying for credit or reject your application because of your religion.
Lenders cannot inquire about a person’s ancestry. They cannot discriminate against non-English speakers or treat applicants differently based upon their names. Under certain circumstances, a creditor can consider your immigration status and whether you have the right to stay in the country long enough to repay the debt.
Specific examples of prohibited sex discrimination include:
- Rating a “female-specific” job (waitress) lower than a “male-specific” job (waiter) for the purpose of granting credit.
- Denying credit because an applicant’s income comes from sources historically associated with women (part-time jobs, alimony or child support).
- Requiring married women who apply for credit alone to provide information about their husbands, while failing to ask men about their wives.
- Denying credit to a pregnant woman because she may take maternity leave.
To date, there are no federal laws prohibiting credit discrimination based on sexual orientation, though some state laws exist.
Lenders can ask whether you are married, unmarried, or separated, but not if you are divorced or widowed. Lenders cannot require a spouse to co-sign for a loan if the applicant requests an individual account.
A woman can choose to use her first name and maiden name (Mary Smith), her first name and husband’s last name (Mary Jones), or a combined last name (Mary Smith Jones).
Spousal information can be required if:
- A spouse will be permitted to use, or be liable for, the account.
- You are relying on your spouse’s income, or alimony or child support from a former spouse, to repay the loan; or
- You live in a community property state.
Provided you have the capacity to enter into a binding contract, lenders cannot discriminate against you based on your age. They can, however, use your age to determine other factors – such as the fact that you are close to retirement and your income may soon drop. They can always use your age for preferential treatment.
Source of income
Lenders cannot discriminate against you because some or all of your income comes in the form of public assistance, child support, alimony, Social Security, part-time employment, pensions or annuities.
While creditors may ask for the above information, they cannot use it to decide whether to give you credit or how to set your credit terms.
Lenders Will Look at Your Credit History
Creditors can legally ask for, and use, information concerning your financial status, including your employment – what you do, how long you’ve worked and how much you earn. They can inquire about your monthly expenses, how long you’ve lived in your current home or apartment, how many dependents you have, whether you pay alimony or child support, and the amount of any other financial obligations.
They can also look at your credit history, which includes information on:
- How often you’ve applied for credit.
- How much you’ve borrowed.
- Whether you pay your bills in a timely manner; and
- Whether you use your credit prudently.
If you are seeking a secured loan, you will likely be asked to supply information concerning any savings, investments or property that you own that can be applied as collateral.
If your credit needs repair, our financial advocates can help.
Good Credit Risk
A creditor will use all of the gathered financial information to determine if you are a good credit risk, and if so, how much credit you can receive and how much it will cost you in interest. However, when reaching a decision as to whether to grant credit, a lender must apply its standards fairly, impartially and without discrimination.
For example, it cannot lend one applicant money on terms that differ from those granted another applicant with similar income, expenses, credit history, etc. Specifically, the ECOA prohibits discrimination in any part of a credit transaction, including:
- Credit evaluation
- Restrictions in granting credit, such as requiring collateral or security deposits
- Credit terms
- Loan servicing
- Treatment upon default
- Collection procedures
Under the ECOA, a lender must reply to your credit application within 30 days. If credit is denied to you, specific reasons must be cited. You have the right to question the decision, and if you believe that you have been discriminated against, you can contact a lawyer or the Federal Trade Commission (FTC), which is responsible for enforcement of the law.
Consumer Protection Laws
Another consumer protection law is the Federal Fair Housing Act, passed in 1968. It prohibits discrimination in residential real estate transactions, including loans to purchase, improve or maintain a home, or loans in which a home is used as collateral. The law also prohibits discrimination in the rental housing market based on race, color, religion, national origin, sex, familial status and disability.
The Home Mortgage Disclosure Act (HDMA) of 1975 helps to identify discriminatory lending practices by requiring lending institutions to report public loan data. It has led to discoveries that African-Americans, Hispanics and women are more likely to wind up with higher-interest loans.
The Community Reinvestment Act was passed in 1997 to help reduce discriminatory credit practices against individuals living in low-income and minority neighborhoods. It outlawed a common practice known as redlining — denying or increasing the cost of banking to residents of racially defined neighborhoods.
There are also protections for individuals who have filed for, or been through,bankruptcy. Federal law prohibits a private employer from hiring, firing, or otherwise discriminating against you solely because you have filed for bankruptcy.
All federal, state and local governments are prohibited from: denying, revoking, suspending, or refusing to renew a license, charter, permit or other certification necessary for you to make a living; firing you; denying you government contracts; denying or terminating your public benefits — solely because you have filed for bankruptcy.
Remember, none of the statutes or laws guarantees that you will be extended credit. But they do exist to protect you from certain discriminatory practices that can cause credit to be denied you.
Contact the appropriate federal agencies – the Federal Trade Commission and the Department of Housing and Urban Development — for more details.
Legal Options for Discrimination
It might be tempting to take a rate offered by a different lender and move on with your life, but if you know that you are being discriminated against, take it upon yourself to report it, not only for yourself but future generations as well.
Lenders are required to makea good faith determination of the consumer’s ability to afford mortgages and other forms of lending, but “good faith” shouldn’t be distorted by discrimination.
You can confront the lender and bring the discrimination to the attention of a supervisor. For violations of the Equal Credit Opportunity Act (ECOA), you can submit a complaint with the Consumer Financial Protection Bureau. For violations of the Fair Housing Act, file a complaint with the U.S. Department of Housing and Urban Development. You can also contact your state attorney general’s office or consult a lawyer.
Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].
- NA. (2017, August 23) CFPB and American Express Reach Resolution to Address Discriminatory Card Terms in Puerto Rico and U.S. Territories. Retrieved from https://mail.google.com/mail/u/0/#inbox/15e0fe68eb3f8040?compose=15e16bd6ffcd42f1
- Federal Trade Commission. "Equal Credit Opportunity: Understanding Your Rights Under the Law." Retrieve from: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre15.shtm
- Leonard, R., & Lamb, J. (2009). Credit Repair. Berkeley, CA: Nolo.
- Bucci, S. (2011). Credit Management Kit for Dummies. Hoboken, NJ: John Wiley & Sons.