Consumers have different lending needs. When companies offer a variety of products and features, they are helping those consumers meet their credit needs.
However, offering a wide variety of products can also create fair lending risks. The difference between guiding a consumer toward a specific product or feature and illegally steering them is dependent upon whether it is done on a prohibited basis rather than based on an applicant’s credit needs or other compensating factors.
It is not necessary to demonstrate financial harm to a group that has been steered. It is enough to demonstrate that action was taken on a prohibited basis, regardless of the financial outcome.
It is important for lenders to offer different lending products based on credit risk levels; however, you must never consider any prohibited basis when directing a consumer to a product.
An example of steering would be when a mortgage loan originator automatically recommends a higher-priced product, such as an adjustable rate mortgage, to all Hispanic mortgage applicants because they feel that Hispanics typically do not qualify for conventional fixed-rate mortgages. This is illegal steering based on national origin.
Discretionary loan pricing, which may lead to inconsistent loan pricing, may cause disparate treatment or disparate impact.
Disparate impact is a possibility when financial institutions negotiate rates. Applicants who are unaware that they can negotiate prices and/or have limited knowledge about financing may rely on mortgage loan originators to guide them through the lending process. Applicants who are less educated on the process may agree to higher rates than those who are more educated on the process.
If an uneducated applicant also falls into one of the prohibited basis categories, disparate impact may occur.
Even if pricing is negotiated, it should still relate to legitimate credit factors, such as credit scores and repayment history. It is critical that higher pricing is NOT offered solely to profit from an applicant’s lack of knowledge.
A pricing example would be if a lender has one rate sheet that has better pricing for a predominantly “white” area of town so that the lender can be competitive in the market and has a different rate sheet that has higher pricing for a predominantly “Hispanic” part of town because they do not have to be as competitive in the market. This is a perfect example of pricing discrimination and could lead to either disparate impact or disparate treatment violations. Best practice is to have one rate sheet for all parts of town.