Credit and lending discrimination: Know your rights

Federal law makes it illegal for a lender to deny you credit, or offer different terms, based on protected traits like your race, color or religion.

So that means there’s no credit and lending discrimination in the U.S., right?

Well … it’s complicated.

Even with federal protections in place, credit and lending discrimination can still happen in ways that are difficult to detect or prosecute. Lenders often make decisions behind closed doors, making it hard to spot signs of discrimination — even if you know what to look for.

That’s why it’s important to know your rights as a borrower. This awareness can help you protect yourself from potential cases of credit discrimination, yes — but it can also help you feel more comfortable and in control when shopping around for credit.

Let’s go over some key points about credit and lending discrimination, including what to look out for and actions you can take if you suspect a lender is discriminating against you.

• What is credit and lending discrimination?
• Different types of credit and lending discrimination
• 5 ways to help protect yourself from credit and lending discrimination
• Next steps: What to do if you think you’re being discriminated against

What is credit and lending discrimination?

Credit and lending discrimination occurs when a lender allows protected traits, such as race, color or sexual orientation, to influence its decision to offer you credit or a loan. It’s also considered discrimination if you’re offered different credit or loan terms based on those protected traits.

Not all personal traits or factors are off-limits for a lender to consider though. Within limits, lenders can consider relevant information like your credit history, debt and income — all of which may help them determine how likely you are to pay back any money they lend you.

Credit and lending discrimination in the United States

Despite progress made in recent decades, the U.S. has a troubling legacy of discrimination to contend with. And our financial institutions, including the credit and lending system, are a part of that legacy. The federal government recognized the need to protect consumers, including people of color and other marginalized groups, from discriminatory lending practices with the passage of the Equal Credit Opportunity Act in 1974.

The ECOA, along with the federal Fair Housing Act and other legislation, outlines what is considered discrimination when it comes to credit and lending.

Who is protected from credit and lending discrimination?

Under federal law, anyone applying for any form of credit — including a mortgage, auto loan, student loan, credit card or small-business loan — cannot be legally discriminated against based on …

• Race or color
• Religion
• National origin
• Sex, gender or sexual orientation
• Marital or familial status
• Age
• Disability
• Public-assistance status

While the ECOA and FHA cover a lot of ground, other laws, regulations and executive orders have broadened credit discrimination protection to include more groups, including the disability and LGBTQ communities. In fact, the Equality Act, a bill that seeks to make LGBTQ protections explicit, was passed by the House of Representatives in 2019 and 2021 before meeting opposition in the Senate.

What lending practices are considered unfair or discriminatory?

Some unfair practices in lending are obvious — being denied a loan outright solely because you’re a person of color, for example. But there are plenty of other lending practices that could be considered unfair or discriminatory, some of which are much more subtle.

Courts have recognized the following methods of proving lending discrimination under the ECOA.

• Overt evidence of discrimination — A lender openly discriminates against an applicant based on a protected trait. For example, a loan officer tells an applicant that the lender doesn’t approve small-business loans for single women, so she wouldn’t qualify.
• Comparative evidence of disparate treatment — A lender treats an applicant differently from other applicants based on a protected trait. For example, a creditor asks a person of color for more and more documentation attesting to their “creditworthiness,” but doesn’t ask a non-POC applicant with a similar credit and financial background for the same.
• Evidence of disparate impact — A lender implements a policy that applies to all its applicants but is more likely to negatively affect members of a protected group, and there’s no business need for the policy. For example, a lender refuses to provide mortgages for less than $70,000 and the lender has no business justification to do so. (A policy like this could end up excluding a disproportionate number of a protected group due to lower average home values in these communities.)

The Federal Trade Commission, which enforces the ECOA, provides guidance on what is unfair and discriminatory in lending. If you suspect you’re not being treated fairly, the FTC’s list of what a lender can and can’t do isn’t a bad place to start. You can also read this article’s section on five ways to help protect yourself from credit and lending discrimination.

Different types of lending discrimination

U.S. financial institutions (and indeed, the federal government) have a checkered history with discrimination in credit and lending, especially when it comes to mortgages. Entire groups and communities have been segregated or targeted with unfair practices. Let’s take a look at some different types of discrimination in lending and who’s affected.

Redlining and mortgage lending discrimination

“Redlining” generally refers to a policy where lenders isolate neighborhoods based on group makeup and then refuse to extend credit access to those communities on the same terms as to others living elsewhere — even when their credit profiles or situations are similar. It’s a discriminatory practice that dates back to the 1930s, when, historians argue, government entities such as the Federal Housing Administration and the now-defunct Home Owners Loan Corporation used redlining to avoid insuring mortgages for applicants in neighborhoods that were predominantly Black or made up of other minority groups.

Lenders and federal mortgage agencies justified redlining as a means to avoid what they considered to be high-risk loans, but criteria to determine what areas were riskier than others took who lived there into account. Neighborhoods deemed to be the highest risk — often areas where Black, immigrant and other minority communities lived — were filled in red on lending maps to designate areas for mortgage lenders to avoid.

Today, redlining is a recognized violation of the Fair Housing Act. But the mortgage discrimination practices of the early 20th century left a legacy of racial inequality that continues to affect communities of color today. A 2020 study by the National Community Reinvestment Coalition revealed that economic inequalities persist in areas that were designated as “hazardous” on maps drawn by the HOLC in the 1930s.

Reverse redlining and higher interest rates

Reverse redlining is another type of targeted discrimination. Rather than deny credit to a specific community based on a protected trait, lenders instead actively target its members with unfair practices, like preassigning higher rates or other unfavorable loan terms.

This form of predatory lending, while illegal, can still happen. Mortgage lenders might engage in discriminatory practices that push risky, high-cost loans onto people of color — even if POC credit applicants qualify for better conventional mortgage loans. In recent years, the Department of Justice has brought legal action against a handful of lenders for just such predatory and discriminatory practices.

Discrimination when applying for credit or a loan

As you apply for credit or a loan, you should be aware of what a lender can and can’t do.

A lender can ask you for personal information touching on some protected traits, but there are restrictions as to how the lender can use that information. In most cases, a lender can’t use that information to decide whether to offer you credit or at what terms. For example, a lender can ask your race on a credit application. And while you’re not obligated to answer, if you do, the lender can’t outright deny you credit solely based on your answer.

Here’s a list of some of the ECOA’s guidance on what a lender can and can’t do. While it’s not exhaustive, it’s a start at helping you ensure that you’re treated fairly.

• A lender can’t ask about marital status if you’re applying on your own for an unsecured loan (unless you live in a community-property state).
• A lender can ask about race, sex or national origin, though you can choose not to answer. (This information is intended for the federal government to help ensure the lender is not discriminating against you.)
• A lender can ask about your immigration status to determine whether you’ll be in the country long enough to pay the debt.
• A lender can’t ask if you’re planning to have children (but it can consider your current children when talking about expenses).
• A lender can’t require a co-signer if you meet its standard lending criteria on your own.
• A lender can’t turn you down without providing a specific reason within 60 days, if you ask for it (and it can’t be something vague like “you didn’t meet our criteria”).

It’s also illegal for a lender to take certain actions based on a protected trait or characteristic as defined by the federal government, including race, color, religion, national origin, sex, marital status, age or public-assistance status.

Based on a protected trait, a lender can’t …

• Keep information from you about the process (the kind of information provided to other applicants)
• Deny you credit if you otherwise qualify
• Apply different approval criteria than used for other credit applicants
• Discourage you from applying
• Offer credit terms that are worse than what you qualify for (like a much higher interest rate)
• Service your credit or loan account differently
• Close your account

A lender is required to reply to your credit or loan application within 30 days. And if you’re denied credit, ask the lender why — a lender is legally obligated to provide an answer if you ask. If you’re only given a vague reason — or if you suspect discrimination — it’s time to dig deeper. Talk to the lender to get the specifics and ask to speak with management if you aren’t satisfied with the answers.

To learn more about racial justice in lending and initiatives seeking to create change, connect with civil rights groups and other organizations leading the fight, like the NAACP.

5 ways to help protect yourself from credit and lending discrimination

1. Understand your credit

Knowing the impact of your credit history as laid out by the three major credit bureaus is the first step to protecting yourself from credit discrimination.

While there are different variables when it comes to lending decisions, many lenders rely on credit reports and credit scores as important deciding factors. It’s a good idea to monitor your credit often if you’re working on building it, but even if your scores are high, keep an eye on your reports periodically to make sure they’re accurate.

2. Know your rights

We’ve given you a general rundown of your rights as a potential borrower. That’s a start. Your state’s attorney general can also get you up to speed on your rights as a loan applicant in your state. To find out more about mortgage-lending protections, visit the HUD State Information website. Each state’s page will have more information about resources in your area and the laws in your state.

3. Shop around and compare

Shopping around for the best offer available to you is always a good idea. But it can also help raise a flag on discriminatory practices.

Every bank has its own criteria for lending decisions, so you can probably expect to see some differences in offers when comparing between lenders. But if an offer seems way too good to be true when compared to other loan terms you’ve been seeing, ask questions and look for other warning signs. And it’s a good idea to get that offer in writing so that you can read through it and compare it to others.

4. Read the fine print

One good practice when it comes to big financial decisions? Read the fine print. You don’t want to be surprised by the terms of a loan or credit agreement after signing. And while you aren’t likely to see blatant discrimination outlined in the fine print, you’ll want to make sure your lender doesn’t say one thing but print another.

5. Recognize the red flags

There are plenty of obvious examples of what overt discrimination in lending looks like. But there are also smaller, subtler methods of credit discrimination. And while just one of these may not automatically signal a problem, you should be more alert and watchful if you experience any of the following:

• You’re being discouraged from applying.
• Your race, sex, disability or other protected trait is brought into the conversation.
• You’re denied credit, even though you’re qualified per the lender’s stated criteria.
• You’re denied credit without a reason.
• Your offer is for a much higher amount than expected, or it’s too good to be true.

Next steps: What to do if you think you’re being discriminated against

If you’ve seen some red flags and suspect you’re being discriminated against by a creditor or lender based on your race, sexual orientation, religion or other protected trait, there are some steps you can take.

• Document it. Write down names, dates and as many details as you can about the incidents you’ve experienced as soon as possible after they happen — and save any related emails or documents.
• Talk to a manager. Let them know what you’ve experienced and ask for transparency and fair treatment. Again, write down who you talk to, when, and what the conversation covers.
• File a complaint (and do it quickly).
  • For general credit, you can report discrimination to the Consumer Financial Protection Bureau, a federal agency that works to keep bad actors from harming consumers.
  • For mortgage or rental discrimination, you can file a complaint with HUD’s Office of Fair Housing and Equal Opportunity.
• Reach out to an antidiscrimination or rights organization or agency, like the ACLU, Consortium for Citizens with Disabilities or HUD LGBTQ.