U.S. Congress Prohibits Discrimination in the Granting of Credit

Date October 28, 1975

The Equal Credit Opportunity Act passed in 1975 included policies to eliminate credit discrimination and eased the ability of women and minority group members to get loans. The act had major effects on those involved in granting, receiving, and regulating consumer credit; in 1986, those effects were extended to those involved with loans to small businesses and to the businesses themselves.

Also known as Equal Credit Opportunity Act; U.S. Statutes at Large 88 Stat. 1521; Public Law 93-495; U.S. Code 15 § 1691

Locale Washington, D.C.

Key Figures

• William Emerson Brock III (b. 1930), U.S. senator from Tennessee
• Joe Biden (b. 1942), U.S. senator from Delaware
• William Proxmire (1915-2005), U.S. senator from Wisconsin
• Jake Garn (b. 1932), U.S. senator from Utah
• Parren James Mitchell (b. 1922), U.S. congressman from Maryland
• Lindy Boggs (b. 1916), U.S. congresswoman from Louisiana
• Pat Schroeder (b. 1940), U.S. congresswoman from Colorado
• Frank Annunzio (1915-2001), U.S. congressman from Illinois
• Fernand J. St. Germain (b. 1928), U.S. congressman from Rhode Island

Summary of Event

Portions of the Equal Credit Opportunity Act (ECOA) were enacted in 1974. The intent of this act was to protect individuals applying for credit from facing discrimination based on gender and marital status. In 1975, the act was amended several times to prohibit credit discrimination based on race, color, national origin, religion, and age. The prohibition on age discrimination has one exception: An individual applying for credit must have reached the age of majority in his or her home state and must be deemed competent to sign a legally binding contract.

On January 29, 1975, Senator William Emerson Brock III proposed a bill in Congress to amend the ECOA to ban age discrimination. Further amendments were proposed on June 9, 1975, when Senator Jake Garn suggested that the act encompass not only consumer loans but also all consumer lease agreements, since they were also forms of consumer credit. Later in the month, Senators William Proxmire and Joe Biden proposed further legislation related to consumer leasing requiring lenders to disclose all terms of leases to borrowers. On June 12, 1975, Senators Biden and Proxmire proposed a bill encompassing criteria to prohibit consumer credit discrimination based on the following personal characteristics: race, color, religion, national origin, political affiliation, sex, marital status, receipt of public assistance, or exercise of rights under this act. Both the original act and its amendments applied only to individuals applying for consumer credit, not business credit.

Credit is the process of obtaining funds from a lending institution in order to purchase goods and services. The ability of a consumer to obtain credit substantially raises his or her standard of living, as items can be obtained in the present and can be paid for with future income. The creditor (lender) has the ultimate authority as to whom will be granted credit and thus who will have this opportunity.

Traditionally in American society, those deemed by lenders as worthy credit applicants were white and male. There was some logic to this in the fact that prior to the 1960’s a majority of the better-paid workforce with greater likelihood of repaying loans fell into these two categories. The composition of the U.S. workforce began to change drastically in the 1960’s as women and minority group members began to enter the workforce in large numbers and take jobs with better pay, more responsibility, and greater longevity. This change increased the ability of women and minorities to derive incomes and to be able to repay their debts. Old paradigms die hard, however, and lenders were conditioned to believe that these groups were poor credit risks. Congress recognized the social changes taking place and the civil unrest erupting during this time period and enacted various legislation to guarantee equal opportunity. Equality in the process of receiving credit was a relatively low priority, so legislation regarding it was proposed relatively late.

The Federal Reserve Board was the primary regulator involved in monitoring banks’ compliance with this act. Federal Reserve Regulation B was incorporated into the guidelines of banks and was monitored through bank examinations. This regulation codified the intent of the act.

Creditors are in the business of assessing and managing risk, or the chance of loss. Creditors need to assess five different things when evaluating a consumer credit request: character (will the borrower pay), capacity (can he or she pay), conditions (anything particular or unique to the loan request), capital (the borrower’s accumulated wealth), and collateral (the security for the loan). A prudent lender would apply these “five C’s” of credit to make a credit decision. These are the criteria that theoretically determine the creditworthiness of a borrower; factors such as age, sex, race, national origin, and religion are not accurate predictors of a borrower’s willingness and ability to repay a debt and therefore should not be part of the lending decision. Passage of the amended Equal Credit Opportunity Act on October 28, 1975, thus reflected Congress’s desire to exclude irrelevant factors from lending decisions.

Significance

The passage of the ECOA affected all parties involved in the granting and monitoring of consumer credit. This act was directly related to consumers and their attempts to obtain credit. It stipulated that creditors could not ask the sex, race, color, religion, or national origin of an applicant for credit. Loans using real estate as collateral or for home purchases were exempt because of dower rights of married applicants and government monitoring of other categories for fair housing.

The law also established that no individual can be discouraged from applying for credit, each individual is entitled to have credit files maintained in his or her own name, a spouse is not required to sign a loan agreement unless he or she would be responsible for the credit (with the exceptions related to real estate mentioned above), and poor credit obtained with a former spouse cannot be used against a borrower who has established good credit in his or her own name. Creditors may ask about obligations to pay child support or alimony and if applicants are receiving alimony, child support, or public assistance, but applicants do not have to reveal this information, and creditors are not allowed to use receipt of public assistance as a reason for denial of credit. In the case of female applicants, questions regarding types of birth control methods used and plans to have children are illegal. Creditors have the right to determine whether applicants have reached the age of majority but cannot deny a consumer credit because of his or her inability to obtain life insurance. Any other discrimination based on age is prohibited.

In the event that a consumer is denied credit, the ECOA spells out the procedures that must be followed. The lender has thirty days from the date of the application to inform the borrower of the decision on the loan. The creditor has to provide the borrower with the following information in writing: the action that has been taken (acceptance of the agreement, denial, or change in the terms), a statement of the consumer’s rights, the name and address of the federal agency responsible for credit regulation, and whether information was obtained through a credit reporting agency.

Consumers were not the only parties affected by the passage of this legislation. Everyone in the business of granting credit to consumers was forced to comply with new law. The process of conforming began when a lender started to discuss the process of credit with an applicant. Lenders could not use sexist, racist, or other types of discriminatory language that might discourage or offend applicants applying for credit. Credit applications reflected the impact of this law when they began to include the statement that the lender does not discriminate based on the disallowed factors. Individuals involved in the credit application process needed to have proper training to ensure that they were meeting the requirements of the law. Lenders needed not only proper training but also clerical staff to support the paperwork required by the law, such as the written denial notices that had to be sent out on time. The act added direct costs to lenders through the paperwork, training, and compliance measures required. The paybacks for these added costs to lenders were better customer relations, a more positive image of business, and the possibility of entering new and profitable markets as new groups were able to obtain credit.

The passage of any regulation requires monitoring by appropriate regulators. The Equal Credit Opportunity Act covers a vast spectrum of businesses, with different regulators all responsible for their own areas. Commercial banks were regulated either by the Comptroller of the Currency or by the Federal Reserve Board. Savings and loans were regulated by the Federal Home Loan Bank Board, and credit unions were regulated by the National Credit Union Association. Individual states also had responsibilities in ensuring compliance with the law.

Each regulator had various mechanisms to enforce the law. For example, a major portion of a commercial bank’s examination dealt with consumer credit compliance. Bank examiners were often more concerned with loans that were denied than with loans that were made. Regulators have used compliance with ECOA and other consumer regulations in deciding whether to allow banks to merge with or acquire other banks.

Prior to 1986, small-business owners were not protected under the ECOA. Small businesses are viewed as high credit risks. Statistics show that more than half of new small businesses will fail within their first few years, with the most frequent cause of small business failure being inadequate financing brought about by inadequate cash flow. Applicants for small-business loans commonly were bad at providing the following information to the lender: cash flow forecast, a clearly stated purpose for the loan, the amount of the loan, and the time frame and source of repayment. Lenders often required a loan proposal including the above information and a detailed business plan. Most small businesses and their owners are one and the same. Even though loan requests are for business purposes, loans are made to individuals. Congress decided to extend equal credit opportunity to business owners as well as consumers.

On March 19, 1985, Parren James Mitchell and Lindy Boggs proposed a bill to the House of Representatives to amend the Equal Credit Opportunity Act to include owners of small businesses. The bill particularly focused on small-business loans to women and minority group members. Congresswoman Patricia Schroeder, cochair of the Congressional Caucus on Women’s Issues, presented details regarding the discrimination women experienced in obtaining credit to finance small businesses. Her arguments included the fact that women were rapidly entering the workforce as the owners of their own companies and that women were playing a critical role in the creation of jobs. Congressmen Frank Annunzio and Fernand J. St. Germain also played critical roles in the passage of this amendment through their work as members of the Subcommittee on Consumer Affairs and Coinage of the Committee on Banking, Finance, and Urban Affairs. St. Germain remarked that this bill was special to him because he had been the floor manager for the original act in 1974. The amendment exempted large businesses from protection. All banks, savings and loans, credit unions, department stores, credit card issuers, and car and appliance dealers had to comply with this regulation and act without discrimination in their credit decisions regarding loans to small businesses.

The Equal Credit Opportunity Act had major effects on those involved in granting, receiving, and regulating consumer credit. The 1986 amendments extended those effects to those involved with loans to small businesses and to the businesses themselves. The economic environment from the late 1980’s into the early twenty-first century favored small businesses, and women and minority group members were the fastest-growing segments of small-business owners. This occurrence was brought about in large part by the ECOA amendments prohibiting credit discrimination and increasing opportunities for all borrowers.

Bibliography

Beares, Paul. “Regulation of Consumer Credit.” In Consumer Lending. 3d ed. Washington, D.C.: American Bankers Association, 1997. An excellent book dealing with all phases of consumer credit. Written from a banker’s perspective, but easy reading for the layperson. Discusses in detail the process of consumer credit, the “five C’s” of credit, and consumer credit management. A must for all consumer lenders.

Burda, Joan M. An Overview of Federal Consumer Law. Chicago: American Bar Association, 1998. Practical guide prepared by the American Bar Association.

Cole, Richard H. “Regulation of Consumer Credit.” In Consumer and Commercial Credit Management. 8th ed. Homewood, Ill.: Irwin, 1988. Chapter 6, “Regulation of Consumer Credit,” discusses consumer lending regulation in detail. The book is an excellent reference on both consumer and business credit.

Federal Reserve Bank of Philadelphia. How the Equal Credit Opportunity Act Affects You. Philadelphia: Author, 1986. Describes whom ECOA applies to, lenders’ responsibilities, what to do in the case of errors, and consumer remedies. A straightforward publication that is easy to understand.

Moore, Donna. Equal Credit Opportunity Act and Fair Housing Act. 5th ed. Timonium, Md.: Training Pro, 2004. Twenty-four-page review of the laws.

Sirota, David. Essentials of Real Estate Finance. 10th ed. Chicago: Dearborn Real Estate Education Company, 2003. The book in general covers all aspects of consumer real estate finance. An excellent reference for all mortgage lenders.

U.S. Congress. House. Committee on Banking, Finance and Urban Affairs, Subcommittee on Consumer Affairs and Coinage. To Amend the Equal Credit Opportunity Act. 99th Congress, 2d session, 1986. House Document 1575. Government hearings and testimonies amending the ECOA to include small businesses. Includes arguments pertaining to the amendment from both opponents and proponents.

U.S. Congress. Senate. Committee on Banking, Housing, and Urban Affairs, Subcommittee on Consumer Affairs. Equal Credit Opportunity Act Amendments and Consumer Leasing Act—1975. 94th Congress, 1st session, 1975. Summary of the legislation and discussions prior to enacting the ECOA. Includes the bills proposed in Congress and testimony regarding them.