Do Lenders Have to Tell You Why You Are Denied Credit?

As implemented by Regulation B, the Equal Credit Opportunity Act (ECOA) (15 U.S.C. § 1691 and following) is a federal law prohibiting credit discrimination. Under the ECOA, creditors and lenders can't deny loan applications or charge higher costs, like a greater interest rate or more fees, for discriminatory reasons.

This law also requires creditors and lenders to give you a notice if you're denied credit or granted credit on terms different from what you requested. This notice is called an "adverse action notice." The purpose of the notice requirement is straightforward: if creditors know they'll have to explain their lending decisions, they're less likely to make determinations based on discriminatory practices.

If a creditor or lender discriminates against you in violation of the ECOA, you may sue them. Also, once you know the specific reasons for an adverse action, if nondiscriminatory, you can take action to improve your credit or correct inaccurate information in your credit files if the creditor made its decision based on incorrect or incomplete data.

What Kinds of Discrimination Does the ECOA Protect Against?

The ECOA prohibits a creditor or lender from refusing to grant credit or taking another adverse action because of:

• race or color
• national origin
• sex (including gender)
• marital status
• religion
• age (if the applicant is old enough to enter into a contract)
• public assistance status, or
• because the applicant has exercised any right under the Consumer Credit Protection Act in good faith. (15 U.S.C. § 1691(a)).

So, a creditor or lender generally can't deny an applicant's loan application or take another adverse action for any of the reasons listed above.

When Does ECOA Apply?

The ECOA applies broadly to different kinds of loans, like auto loans, credit cards, mortgages, student loans, and small business loans.

What Is an Example of Credit Discrimination?

Say you're denied a mortgage loan because the home you want to buy is in a majority-minority neighborhood. That's lending discrimination. Also, charging Black or Latino customers a higher interest rate than other non-Black or non-Latino customers is a form of credit discrimination.

What Is an "Adverse Action" Under the ECOA?

Under the ECOA, the definition of an "adverse action" includes:

• denying a credit application
• terminating an existing credit account
• making unfavorable changes to an existing account's terms and
• refusing to increase a credit limit. (12 C.F.R. § 1002.2(c)).

When Must a Creditor Provide an Adverse Action Notice?

The ECOA generally requires creditors to provide an adverse action notice within the following:

• 30 days after receiving a completed application
• 30 days after taking adverse action on an incomplete application
• 30 days after taking adverse action on an existing account or
• 90 days after notifying the applicant of a counteroffer if the applicant doesn't expressly accept or use the credit offered. (12 C.F.R. § 1002.9).

Content Requirements for Adverse Action Notices

The notice must be in writing and contain a statement of the action taken and the reasons for the adverse action, which must be specific and indicate the principal reasons for the adverse action. Alternatively, the notice may provide a disclosure of the applicant's right to get a statement of specific reasons and the name, address, and telephone number of the person or office from which this information can be obtained. (12 C.F.R. § 1002.9(b)(2)).

Violations of the ECOA often involve inaccurate, confusing, or ambiguous statements about the principal reasons for an adverse action.

Creditors Must Provide Adverse Action Notices Even When Using Complex Technology to Underwrite Loans

Some creditors use complex algorithms when making credit decisions. These models are sometimes called "black box," meaning it's difficult, if not impossible, to identify the exact reasons for denying credit or taking other adverse actions.

But, again, federal law requires creditors to give specific and accurate reasons when taking an adverse action when it comes to credit. So, the Consumer Financial Protection Bureau (CFPB) has said that the ECOA requires an adverse action notice when denying credit or taking another adverse action, no matter what technology the creditor uses to make its lending decisions. Creditors who fail to do so violate the ECOA.

How to Identify Signs of Credit or Lending Discrimination

Lending discrimination isn't always obvious. Some subtle indications that a creditor or lender might be discriminating against you are:

• The creditor or lender tries to dissuade you from applying for credit or a loan.
• The creditor or lender treats you differently after meeting you than when on the phone.
• The creditor or lender denies you credit or a loan even though you're qualified.
• The creditor or lender gives you a high interest rate even though you qualify for a lower rate.

If a creditor or lender denies your application or offers you a loan or credit, but the terms are worse than you expected, and you suspect discrimination, ask questions about the factors on which the decision was based. And, of course, review the adverse action notice carefully.

What You Can Do About Credit or Lending Discrimination

If a creditor or lender discriminates against you in violation of the ECOA, you can complain to the creditor. You might be able to convince them to reconsider your application. If that doesn't work, you might be able to sue them. If you're successful, the court may award regular damages, up to $10,000 in punitive damages, and attorneys' fees. So, if you believe your rights were violated under the ECOA, consider speaking to a lawyer.

You may also file a complaint with your state attorney general's office, the CFPB (financial institutions), or the Federal Trade Commission (creditors that aren't financial institutions, like car dealers). If the discrimination is related to housing, contact the Department of Housing and Urban Development at 800-669-9777 or file a complaint at HUD.gov.

Get More Information

For comprehensive credit information, including how to improve your credit, get Credit Repair by Amy Loftsgordon and Cara O'Neill (Nolo).