Credit Discrimination

Background

Credit discrimination historically has been and continues to be a pervasive problem in the U.S. Affordable credit is sometimes unavailable to people of color, women, people with disabilities, older adults, and people who identify as LQBTQ+, among others. This is due to discriminatory lending practices that restrict access to homeownership, higher education, and small-business ownership. The uneven access to credit for individuals and business owners based on factors such as race and sex contributes to racial and gender wealth gaps. 

Credit discrimination affects access to different products and services. Discrimination can adversely affect someone’s ability to obtain market-rate mortgages. Many banks do not open branches in low-income neighborhoods and neighborhoods of color. Discriminatory lending also is a problem in auto financing and credit cards, both in terms of access and rates charged. Moreover, discrimination is not limited to racial discrimination. Creditors sometimes discriminate on the basis of an applicant’s national origin (including limited English-language proficiency), sex (including sexual orientation and gender identity), marital status, familial status, disability, age, religion, or source of income, such as use of public assistance and housing vouchers. Discrimination can also happen at different stages of a credit transaction, including advertising and loan servicing and debt collection. 

Another consequence of credit discrimination is the increase of alternative financing products, such as payday loans, rent-to-own goods, and tax refund anticipation loans, targeted at those underserved by traditional lenders (see also the Alternative Financial Services section of this chapter). People from communities of color disproportionately use these high-cost credit products, some of which feature triple-digit annual percentage rates. 

A crucial federal law used to combat credit discrimination is the Equal Credit Opportunity Act (ECOA). ECOA prohibits creditors from discriminating against an applicant for any part of a credit transaction on the basis of race, color, national origin, sex (including gender identity and sexual orientation), marital status, age, source of income, public assistance, and religion. Source-of-income discrimination is not specifically prohibited under the Fair Housing Act Under some circumstances, the practice could violate the act. Some states do, however, specifically prohibit housing discrimination based on source of income (see also policy on source-of-income discrimination). 

The Consumer Financial Protection Bureau has primary authority for oversight and compliance for ECOA, though several other federal agencies have the power to supervise or enforce the law (or both). The Bureau, in its Request for Information for ECOA rulemaking, noted that it found evidence of disparate impact in lending under ECOA. Disparate impact occurs when particular lending practices disproportionately deny credit or provide unfavorable terms of credit to women, people of color, people with disabilities, families with children, and other groups protected by ECOA and other anti-discrimination laws. 

ECOA also protects consumers from discriminatory underwriting that relies on new technologies, including artificial intelligence and machine learning models. Lenders are increasingly using these to make credit determinations. These automated underwriting systems can streamline applications and lower costs, but they also can perpetuate discriminatory lending practices, underscoring the importance of consumer protections (see also Algorithmic Accountability). 

CREDIT DISCRIMINATION: Policy

CREDIT DISCRIMINATION: Policy

Equitable access to credit

The Consumer Financial Protection Bureau and the other agencies with authority to enforce the Equal Credit Opportunity Act should fully enforce federal nondiscrimination laws intended to decrease credit discrimination, including on the basis of age and sex (which includes sexual orientation and gender identity). These laws apply to financial institutions’ lending practices, including whether a loan is offered and its rate. These include: 

  • enforcing the Equal Credit Opportunity Act, 
  • investigating existing credit practices, and 
  • ensuring the availability of commercial credit for older women. 

The bureau should address source-of-income distinctions, such as those between retirement and employment incomes, to prohibit indirect discrimination against older adults. 

Policymakers should prohibit the use of the rule of 78s in calculating refunds of interest and insurance charges when a loan is repaid early. This mathematical formula results in a smaller refund to the borrower.