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Credit Discrimination: 3.7.1 General

If discrimination does not involve one of these listed prohibited bases under the Equal Credit Opportunity Act (ECOA), the federal Fair Housing Act (FHA), the federal Civil Rights Acts, or a state’s general anti-discrimination statute, the consumer has three strategies to show such discrimination to be actionable. First, does the basis for credit discrimination have a disparate impact on a protected class?

Credit Discrimination: 3.7.2 Discrimination and the Digital Divide

A growing practice that is likely to have a disparate impact on protected classes is the offering of preferential or exclusive credit terms to consumers who apply online.221 Studies indicate lower access and use of the internet by various protected groups, such as African Americans, Hispanics, older citizens, people with disabilities, and those on public assistance.222 Therefore, a creditor who offers “internet-only” deals, or special discounts for applying online, is likely going to disproporti

Credit Discrimination: 3.8.1 General

The Equal Credit Opportunity Act (ECOA) and Regulation B set out a clearly delineated and limited exception to the general rule prohibiting discrimination on a prohibited basis, called special purpose credit programs.234 These programs may require that program participants share a common characteristic, such as race, national origin, or sex.235 For example, a special purpose credit program may be set up to assist individuals of color, women, or young applicants.

Credit Discrimination: 3.9.1 The General Rule Under the ECOA

Prohibited credit discrimination under the Equal Credit Opportunity Act (ECOA) may be based not only on the characteristics of the applicant but on the characteristics of the applicant’s business partners, its officers (in the case of a corporate applicant), and the individuals with whom the applicant affiliates or associates.262 Thus, the ECOA prevents discrimination in the offering of credit based on the race, religion, sex, or other characteristics of those with whom the applicant deals or of those who will benefit if the applicant obtains

Credit Discrimination: 3.9.2 Application of ECOA Rule to Public Assistance and to the Exercise of CCPA Rights

The general ECOA rule that a creditor may not discriminate against an applicant because of individuals the applicant associates with is at least true when the discrimination is based on the race, color, religion, national origin, sex, marital status, or age of those with whom the applicant deals.267 This “associational” protection should also extend to the remaining two protected ECOA categories—receipt of public assistance and good faith exercise of rights under the Consumer Credit Protection Act.

Credit Discrimination: 6.6.4 Marital Status

A creditor may not consider an applicant’s marital status to determine the applicant’s creditworthiness, except as otherwise permitted or required by law.308 In evaluating joint applications, a creditor cannot treat applicants differently based on the existence, absence, or likelihood of a marital relationship between the parties.309

Credit Discrimination: 6.4.5.4 “Coaching”

The potential for discrimination in the supposedly objective process of generating credit scores also arises when loan officers engage in selective “coaching” of applicants.173 If a loan officer provides more information and assistance to White applicants in filling out their applications, those applications may be more likely to generate higher credit application scores and to qualify under automated underwriting systems.174

Credit Discrimination: 6.4.5.5 Credit Tier Markups

Most lenders now use credit scores to determine not only whether a consumer will be approved for credit but at what price the credit will be provided—so-called “risk-based pricing.” Essentially, the higher the credit score, the lower the price for credit. In addition to questions as to the justifiability of risk-based pricing,175 many loan brokers and loan officers have “marked up” the price of credit by selling the borrower a higher rate than what the borrower’s credit score qualifies them for.

Credit Discrimination: 6.4.6.2.1 Challenges to insurance credit scores

A particularly controversial issue is the use of credit scores by automobile and home insurers to determine whether to insure a consumer and at what price. The credit scores used by insurers, or “insurance scores,” are specially developed for insurers and not the same as generic credit scores.

Credit Discrimination: 6.4.6.2.2 Studies of the disparate impact of insurance credit scores

In the 2000s, a number of state insurance commissions conducted studies on the relationship between insurance scores and certain demographic characteristics, including race, gender, age, and income. A study commissioned by the Washington State Insurance Commissioner showed a correlation between insurance scores and income; however, its findings regarding the racial impact of insurance scoring were inconclusive, primarily because of the small number of people of color sampled from Washington State’s relatively homogeneous population.206

Credit Discrimination: 6.5.1 Introduction

The following section discusses the special Equal Credit Opportunity Act (ECOA) prohibitions on certain types of credit discrimination that are indirectly linked to a prohibited basis. Examples are credit decisions based on the applicant’s likelihood of childbearing, type of income, telephone listing, and certain aspects of credit history. These special ECOA rules provide protection for women and, to a lesser extent, for applicants aged 62 or over.

Credit Discrimination: 6.5.2.1 General

The ECOA protects applicants from a creditor’s inappropriate consideration of certain sources of the applicant’s income. These protected income sources include income derived from part-time employment, alimony, child support, separate maintenance, retirement benefits, or public assistance.218 These sources of income are related to age, sex, marital status, and public assistance status, and the regulations therefore seek to prevent discrimination based on these sources of income, which could have a disparate impact on a protected group.

Credit Discrimination: 6.5.2.2 Appropriate Methods to Evaluate Protected Income

The ECOA protects applicants from inappropriate evaluation of sources of protected income but does not guarantee that every applicant with such income will be granted credit. A creditor need not consider income at all in evaluating creditworthiness.219 If the creditor does consider income, there are several acceptable methods of evaluating income.

Consumer Credit Regulation: 15.1.1.1 What are RALs?

Refund anticipation loans (RALs) are short-term loans secured by a taxpayer’s expected refund and repaid directly from the proceeds of the refund sent by the Internal Revenue Service (IRS). The mechanism for direct repayment of the RAL is a temporary or “disposable” bank account set up by the lender, into which the IRS is instructed to send the refund. The loans are repaid when the consumer’s refund is direct deposited into that account.

Consumer Credit Regulation: 15.1.3 Refund Anticipation Checks

Related to bank RALs are refund anticipation checks (RACs), also commonly called “refund transfers.” A RAC is a supposedly non-loan product involving a temporary bank account. The bank allegedly does not make a loan, but instead waits until the IRS direct deposits the refund into the disposable bank account set up for that purpose. After the refund is deposited, the bank issues the consumer a check or prepaid card or makes a direct deposit into the consumer’s own account, and then closes the disposable account.

Consumer Credit Regulation: 15.1.4 Tax Refund Assignments

Another form of tax-refund-based lending is the assignment of a taxpayer’s expected tax refund in return for an immediate cash payment.41

Lenders seek to characterize these as the sale of a chose in action, in which the lenders claim that they are buying the borrower’s right to receive the refund. These products are actually disguised loans containing hidden interest in the form of a “discount” from the full value of the refund.42