- Credit discrimination is an unfair practice where creditors make lending judgments based on protected characteristics.
- Signs of credit discrimination include your creditor discouraging a loan application or asking for irrelevant personal information.
- To prevent credit discrimination, know your credit rights and how to report suspected discrimination.
Imagine being denied a loan or charged exorbitant interest rates, not because of your financial history or credit score, but due to factors you can't control — like your ethnicity, nationality, age, or disability.
Unfortunately, while credit discrimination is illegal, it exists and continues to perpetuate economic inequality in our society.
To avoid falling victim to these unfair lending practices, know your rights and learn how to recognize signs of credit discrimination. With this knowledge and awareness, you can level the playing field and ensure you're being treated fairly.
What is credit discrimination?
Credit discrimination, also known as lending discrimination, is an unfair practice where creditors — such as banks, mortgage companies, and online lenders — make lending decisions based on protected traits like race, gender, or nationality. An example of credit discrimination is when a bank denies a credit application from a Hispanic, Asian, or Black woman even though she has a similar credit score and income level as a white male applicant.
Though the Equal Credit Opportunity Act (ECOA) of 1974 outlawed this discriminatory conduct in the United States, making it illegal for creditors to discriminate against borrowers based on factors other than their creditworthiness, it has not put a complete end to this issue. A 2022 study by the National Community Reinvestment Coalition found that people of color are 40% to 80% more likely to be denied loans, with the disparity reaching 250% in some metropolitan areas.
Credit discrimination in the United States
Credit discrimination has a deep-rooted history in the United States, often reflected through practices like redlining (a type of mortgage discrimination) and predatory lending targeting minorities and low-income individuals. This prevented people of color from building wealth for generations.
For instance, between 1934 and 1962, just 2% of the $120 billion worth of housing loans insured by the Federal Housing Administration (FHA loans) went to non-white households.
Another example of credit discrimination is when millions of Black service members were denied the benefits of the Servicemen's Readjustment Act — commonly called the GI Bill — in 1944. Out of the 3,000 mortgages the Veterans Administration guaranteed in Mississippi, only two went to African Americans, despite Black Americans making up half of the state's population.
While the Equal Credit Opportunity Act significantly reduced explicit credit discrimination, disparities still exist. Today, non-white households are still less likely to own their own homes when compared with white families due to credit discrimination. Research shows that only 41% of Black households own their own home, compared with more than 73% of white households.
Signs of unfair or discriminatory lending practices
The Consumer Financial Protection Bureau provides a list of warning signs to look out for if you feel you're being discriminated against by a creditor. If one or more of the following red flags apply to you, it may be time to file a complaint or take legal action.
- The creditor treats you differently in person than online or on the phone.
- The creditor keeps discouraging you from applying for credit, even though you're eligible.
- You're encouraged to apply for loans with less favorable terms. For example, ones with higher interest rates and fees.
- The creditor has made negative comments about your race, nationality, age, sex (including sexual orientation or gender identity).
- Your application was rejected even though you qualified for it, and the lender cannot provide a reasonable explanation.
- The lender offers a higher rate than you applied for, even though you qualify for a lower rate.
3 main types of credit discrimination
There are three main types of credit discrimination to look out for as a borrower.
Overt discrimination
Overt discrimination is the most explicit and direct type of credit discrimination. It's when a creditor blatantly discriminates against a borrower on the basis of their protected trait, like race, color, nationality, religion, or sex. For example, a loan officer tells you outright they refuse to approve your small-business loan because you're Muslim.
Disparate treatment
While disparate treatment is more subtle than overt discrimination, it's equally damaging and is the most common type of credit discrimination. It's when lenders treat an applicant differently solely based on a protected trait. For example, a loan officer asks a Native American woman to provide more documentation to prove their creditworthiness, whereas a non-POC friend with the same credit and financial background isn't asked to do so.
Disparate impact
Disparate impact happens when a creditor implements a policy that applies to all applicants but is more likely to affect members of a certain group negatively. An example would be a mortgage lender refusing to offer loans less than $100,000. Even if the policy was not designed with discriminatory intent, it could exclude aspiring homeowners in communities with lower average home values.
What are your rights as a borrower?
Under the Equal Credit Opportunity Act, creditors cannot discriminate against applicants applying for any form of credit based on their race or color, religion, national origin, sex, marital status, age, disability, or public assistance status.
When applying for credit, it's important to know your rights as a borrower. According to the Federal Trade Commission, here's what lenders cannot do during the application process.
- Give you different terms or conditions, interest rates, or fees based on your personal characteristics
- Close your account
- Discourage you from applying for credit or reject your application based on your protected traits
- Consider whether you have a telephone account in your name
- Ask about your marital status when you apply for a separate and unsecured account, and you don't live in a community property state
- Ask for information about your spouse if your spouse is not applying for credit with you, will not use the account, you don't rely on their income, and you don't live in a community property state
- Ask about your plans for having or raising children
- Ask if you receive alimony or child support
If your application was rejected, you have the right to ask the lender to tell you the specific reason for the rejection. For example, was it because your income was too low? Or was it because you didn't meet the debt-to-income ratio requirements? If you believe credit discrimination was the reason for your application rejection, you have the right to report your concerns to the appropriate government agency or even pursue legal action.
How to protect yourself from credit and lending discrimination
Credit discrimination can sometimes be subtle and hard to spot. Here are a few ways to protect yourself against discriminatory lending practices and receive the treatment you deserve.
Understand your credit
If you have no idea where you stand in terms of your credit health, request a free copy of your credit reports from each of the three consumer credit reporting companies by visiting AnnualCreditReport.com. Understanding your credit allows you to recognize whether you're being discriminated against. If you boast a FICO score of 700 or above, you could generally qualify for competitive rates on the best personal loans and credit-related products.
Recognize the red flags
A common sign of a discriminatory lender is if they offer you less favorable terms, such as a higher-than-average personal loan interest rate, without a clear reason. Another alarm bell might be when a lender discourages you from applying for credit or when the terms and conditions you're offered are not the same as those advertised. You should also be wary if the lender keeps asking you for information irrelevant to your application, such as your race, religion, sexual orientation, or nationality.
Comparison-shop
Taking the time to shop around and compare lenders could help you identify discrepancies in loan terms compared to the market average. For example, if you come across a lender offering outrageous interest rates or stricter conditions, it might be a sign that they're engaging in unfair and discriminatory lending practices.
Know your rights
Before working with a lender or creditor, familiarize yourself with the laws regarding credit and lending discrimination, such as the Equal Credit Opportunity Act and the Fair Housing Act. Your state's attorney general can also get you up to speed on your rights as a borrower. And if you believe you've been a victim of credit discrimination, you have the right to report it to the appropriate authorities or seek legal action.
What to do if you suspect you're being discriminated against by a creditor
Being discriminated against by creditors based on factors like your race, gender, or religion can be dehumanizing and frustrating. Take these steps to stand up for yourself and protect your rights.
Document it
Jot down the names, dates, and other details as soon as you realize you're experiencing credit discrimination. Documenting this information helps you more accurately recall what happened and can also come in handy when you file a complaint or take legal action. Don't forget to save any physical documents or emails related to the incident.
File a complaint
"When you're denied credit, the lender is required to disclose the reason as well as both the name and address of the agency you can contact to report any suspected violations of federal credit discrimination laws," says Robert Kleinfeldt, senior corporate counsel at Romano Law. "If you suspect that you've been a victim of credit discrimination, immediately notify the creditor and report the matter to the respective federal agency."
You can submit a complaint with the Consumer Financial Protection Bureau online or call (855) 411-CFPB (2372). For discrimination related to mortgages, file a complaint with HUD's Office of Fair Housing and Equal Opportunity. Be ready to provide information on the dates, amounts, and other details about your case.
Reach out for help from antidiscrimination organizations
For example, the American Civil Liberties Union (ACLU) is a nationwide nonprofit organization that works in courts, legislatures, and communities to defend the individual rights of U.S. citizens. You can contact your local ACLU affiliate for assistance and advice regarding your case.
Seek legal advice
If your complaint doesn't resolve the issue, consider reaching out to your state attorney general or a lawyer specializing in credit discrimination cases. While suing the creditor in federal district court can be intimidating, it could be worth pursuing, especially if you've suffered damages due to the discriminatory practice. Check out this Lawyer Referral Directory if you need help finding a trustworthy attorney.
FAQs
What should I do if I think I was denied credit because of credit discrimination?
If you think you have experienced credit discrimination, make sure that you document it. Record as many details as possible. Next, file a complaint. You can file a complaint with the Consumer Financial Protection Bureau or HUD's Office of Fair Housing and Opportunity.
Which law prohibits credit discrimination?
The Equal Credit Opportunity Act (ECOA) prohibits discrimination in any aspect of a credit application based on race or color, religion, national origin, sex, marital status, age, disability, or public assistance status.
What happens if I am denied credit?
If you are denied credit, the lender must provide you with a notice that includes the reasons for the denial and the credit reporting agency they used to make their decision. The FCRA also gives you the right to obtain a free copy of your credit report within 60 days of the denial.
