What is an Effects Test?

Malcolm Tatum

An effects test is a type of assessment or evaluation that focuses on the impact that different credit policies have on the ability of an individual to obtain credit for the purchase of property, automobiles or even a credit card account with an equitable rate of interest. The idea behind these types of tests is to identify if the policies used to consider the application of the consumer are in some way discriminatory, in terms of current government regulations that prohibit that form of discrimination. In the event that the results of the test do indicate that the policy allows discrimination of a protected consumer class, action to amend the credit policy and possibly action to provide redress to the injured consumer are likely to take place.

Effects tests identify if the policies used to consider a credit application of a consumer are in some way discriminatory.
Effects tests identify if the policies used to consider a credit application of a consumer are in some way discriminatory.

The concept of an effects test is common in the United States. At the heart of the testing process is determining if a given credit policy is in compliance with the Equal Credit Opportunity Act. This act specifically makes it illegal to deny credit to a consumer based on factors such as national origin, age, marital status, or if the applicant’s main source of income is public assistance of some type. Similar prohibitions are found in other legislation that may influence the effects test, with the Fair Housing Act providing a standard for evaluation in situations where the purchase of real estate or the securing of a lease on rental property is involved.

Other nations also make use of an effects test in some form. Countries like the United Kingdom, Canada, Australia, and many other nations around the world where specific anti-discrimination laws are in effect to protect the rights of consumers often have some sort of standardized means of assessing if a particular credit policy is or is not in compliance with those laws. In most cases, consumers who feel they have been unjustly denied credit due to a breach of these laws can secure legal counsel and file a claim against the creditor, citing the evidence or reasons for filing the complaint.

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An effects test is usually triggered when a consumer believes he or she has been unlawfully discriminated against when applying for a loan or some other form of credit, or attempting to rent an apartment or other dwelling. At that point, it is possible to file a discrimination complaint with a governmental agency that is empowered to investigate the policy and determine if discrimination has indeed taken place. In some countries, the outcome of the effects test may result in a revision of the discriminatory policy and the reconsideration of the injured party’s credit application. There are some jurisdictions where the injured party may also file suit and seek redress for the act of discrimination.

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