Credit Discrimination: 2.3.3.2 Credit Actors Covered by Section 3604
Section 3604 applies to any person selling or renting property, with the following exceptions.
Section 3604 applies to any person selling or renting property, with the following exceptions.
Section 3617 of the Fair Housing Act (FHA) makes it unlawful to coerce, intimidate, threaten, or interfere with any person in the exercise or enjoyment of, or their having exercised or enjoyed, or their having aided or encouraged any other person in the exercise or enjoyment of, the rights granted or protected by sections 3603, 3604, 3605, or 3606 of the Act.295 Thus, if defendants have violated one of the four enumerated sections, they have also violated section 3617.296 It is also possible to
The Fair Housing Act (FHA) prohibits certain types of discrimination and specifies that these prohibitions protect “any person.”305 The only limit as to who can bring a case under the Act is that the individual be “aggrieved.”306 “Aggrieved person” is defined in the regulations implementing the Act as any person who claims to be injured by a discriminatory housing practice or believes they will be injured by a discriminatory housing practice that is about to occur.
The federal Civil Rights Acts apply only to discrimination based on race, certain ethnic origins, and citizenship status.315 Within these parameters, however, they are generally broad in scope.
This chapter focuses on discrimination in the credit evaluation process. It discusses examples of credit evaluation practices that violate the general rule against discrimination as well as the special Equal Credit Opportunity Act (ECOA) requirements with respect to credit evaluation.
The Equal Credit Opportunity Act (ECOA) and Regulation B prohibit discrimination in credit evaluation on a prohibited basis.
The general rule against discrimination prohibits creditors from applying different standards to applicants on a prohibited basis. For example, creditors may not use one set of underwriting standards for White applicants and another, more stringent, set of standards for protected groups.5
The general rule against discrimination prohibits creditors from implementing different investigatory procedures on a prohibited basis. Regulation B specifically states that creditors may not discriminate on a prohibited basis as to “investigation procedures.”14 Thus, creditors may not order credit reports on the spouses of married women who apply for individual accounts but not on the spouses of married men who apply for individual accounts.15
In applying for home mortgage loans, the appraisal of the real estate can have a significant impact on whether an applicant qualifies. Differences in appraisal practices on a prohibited basis are specifically prohibited by the Fair Housing Act (FHA)16 and should violate the Equal Credit Opportunity Act (ECOA) and sections 1981 and 1982 of the Civil Rights Acts as well.
If the creditor is using the second approach and evaluating every component of the applicant’s income for reliability, the creditor may not discount or exclude from consideration the income of an applicant or the spouse of an applicant because of a prohibited basis.223 In addition, the creditor may not automatically discount or exclude from consideration any protected income. The discount or exclusion must be based on the applicant’s actual circumstances.224
The previous subsection discussed whether a creditor could treat certain types of protected income as unreliable and thus discount or ignore that income. A separate but related issue is whether creditors may score or treat income differently if it comes from multiple sources rather than from a single source. This issue is particularly important because women and older applicants are more likely to have multiple sources of income.
A creditor may not automatically exclude from consideration income of an applicant or applicant’s spouse derived from part-time employment, annuities, pensions, or other retirement benefits, or consider only a portion of such income.234 Evaluation of protected income from sources such as Social Security or retirement benefits must be made on an individual basis and not be based on aggregate statistical relationships such as those underlying credit scoring models.
Regulation B prohibits creditors from automatically discounting income from certain sources historically associated with women, such as part-time employment.238 Other sources of income traditionally available primarily to women, such as alimony, child support, and separate maintenance payments, also may not be discounted automatically when an applicant is relying on such income to support the application.239 A person receiving such income may choose not to include it when submitting a credit app
Public assistance status as a prohibited basis and treatment of public assistance income as protected income are so closely related that a discussion of one effectively merges into the other. Therefore, discussion of income sources associated with public assistance is detailed in conjunction with the discussion later in this chapter of the ECOA rules concerning public assistance generally.245
Regulation B attempts to assist two groups of women that historically have had problems with credit histories.246 First, the Equal Credit Opportunity Act (ECOA) gives special rights to applicants (primarily women—whether married, divorced, or widowed) who have not been able to reap the benefits of their good credit histories because their accounts were recorded in their spouses’ (husbands’) names.
Regulation B requires creditors who consider the credit history of applicants to consider the credit history, when “available,” of accounts designated as accounts that both the applicant and applicant’s spouse are permitted to use or for which both are contractually liable.248 What information is considered available is not defined in Regulation B, but the Federal Reserve Board stated in a letter that creditors are not required to conduct any investigation of whether a spousal account exists given the prohibition against asking about marital
On the applicant’s request, the creditor must consider any information that the applicant presents “that tends to indicate” that the credit history being considered by the creditor does not accurately reflect the applicant’s creditworthiness.259 The creditor has no affirmative duty to request this information; the burden is placed on the applicant to explain why the applicant should not be denied credit because, for example, a poor credit rating is attributable to the conduct of an ex-spouse during the marriage.
A creditor may not consider whether there is a telephone listing in the applicant’s name as a factor relevant to creditworthiness; but it may consider the existence of a telephone at the applicant’s residence as such a factor.265 This provision was primarily designed to protect married women, who may not have had telephone listings in their own names.
In evaluating an applicant’s creditworthiness, a creditor may not make assumptions or use aggregate statistics concerning the likelihood that the income of any group of persons will be interrupted or diminished at a future time because those persons will bear or rear children.266 In addition, creditors are forbidden from denying loans to women who anticipate taking maternity leaves.267 Read together with the provision of Regulation B,268 which bars
One form of discrimination that is not obvious is the refusal to allow a customer to delay payment until some time after the goods or services have been delivered. For example, various tradespeople, doctors, or merchants, while not formally offering credit, will allow certain customers to mail in their payments later while requiring immediate payment up-front from other customers.
The amount of credit to be extended is also subject to the general rule against discrimination. Thus, an individual unmarried applicant should be evaluated for and receive the same credit limit as a similarly situated married applicant.
One interesting potential use of the ECOA is when a creditor denies credit (or in any other way distinguishes the applicant) because the applicant does not wish to buy allegedly optional credit insurance.
In order to understand discrimination in the credit evaluation process, it is essential to understand the different systems used for credit evaluation and how these systems operate. There are basically three types of credit evaluation systems used by creditors: (1) credit scoring systems, (2) judgmental systems, or (3) combined systems that share aspects of both of the other two systems.
A credit scoring system is one that numerically weighs or “scores” some or all of the factors considered in the underwriting process. There has been an explosive growth in the use of credit scoring systems over the last two decades, and this growth has been accompanied by some controversy.