Fair lending. The name says it all. Fair lending laws protect applicants and borrowers from discrimination.
In this lesson, we will review the basics of the federal fair lending laws and regulations that govern the mortgage industry.
We will be reviewing these laws and others and discussing what they are designed to provide for protection. We’ll also review what you need to do to be compliant with these laws and offer credit in a fair and equitable manner.
Lending Discrimination Statutes and Regulations
There are various federal fair lending laws that are in place to protect consumers from unfair lending practices. Let’s introduce the following laws:
There are two key laws that govern the way you do business:
- The Fair Housing Act
- The Equal Credit Opportunity Act
The Fair Housing Act (FHA)
FHA prohibits discrimination in the sale, rental and financing of dwellings and other housing-related transactions based on race, color, religion, national origin, gender, handicap and family status (including children under the age of 18 living with parents or legal custodians, pregnant women and people securing custody of children under the age of 18). These are often referred to as “Prohibited Factors.” The Department of Housing and Urban Development (HUD) interprets the gender prohibition to include discrimination based on gender stereotyping, but not based on sexual orientation. For lending, FHA covers any person whose business includes engaging in residential real estate-related transactions, such as the making of loans.
The Equal Credit Opportunity Act (ECOA)
ECOA prohibits credit discrimination based on race, color, religion, national origin, sex, marital status and age, as well as on whether an applicant receives public assistance or the applicant has exercised rights under the Consumer Credit Protection Act. The Consumer Financial Protection Bureau (CFPB) interprets the gender prohibition to include discrimination based on sexual orientation. Only in certain, limited situations may creditors ask for most of this information, and this information may not be used when creditors are deciding whether to extend credit or when setting the terms of the credit.
ECOA applies only to “creditors,” but under ECOA everyone who participates in a credit decision is a creditor. As a mortgage broker or non-delegated correspondent, you will generally be subject to ECOA for your part in the loan process.
Not everyone who applies for credit gets it or gets the same terms: Factors like income, expenses, debts and credit history are among the considerations lenders use to determine creditworthiness. FHA and ECOA are not intended to replace your judgment about the creditworthiness of a potential borrower.
Under FHA and ECOA, it is against the law to deny a loan based on a prohibited factor or to give a borrower different loan terms based on a prohibited factor.
Considering any of these factors at any stage of the loan origination process is a violation of FHA and ECOA.
It’s important to understand that government agencies have said both FHA and ECOA prohibit more than just intentional discrimination. A practice that has the effect of producing different success rates for applicants with different characteristics, or different average loan terms, can be unlawful even if the discriminatory effect was not intentional, if the company doesn’t have a legitimate business need for the practice.
Let’s discuss prohibited factors.
Prohibited Factors – Redlining
Redlining – or not making credit available for housing in certain neighborhoods based on neighborhood characteristics like racial makeup, even though an applicant in that neighborhood may be qualified for credit – is prohibited.
Prohibited Factors – Appraisals
Making excessively low or high appraisals of property based on racial or other prohibited considerations is a prohibited factor.
Prohibited Factors – Underwriting Standards
Using arbitrary, subjective, and non-reviewable criteria by requiring different underwriting standards for minority applicants is a prohibited factor. Mortgage brokers do not make underwriting decisions; however, it is still important to understand that this is a prohibited factor in fair lending.
Prohibited Factors – Images
Creating and exploiting racially exclusive images, such as using only Caucasians in advertisements, may suggest that applicants of another race are not sought.
Prohibited Factors – Discouraging Applicants
Expressing an intent to discriminate is illegal, as is discouraging applicants based on a prohibited factor.
It is your responsibility to ensure all applicants are treated equally in the loan process.
Additionally, all advertising and solicitations must be directed equally to the general public and convey the offer of credit in a neutral, unbiased manner to ensure all recipients perceive the advertisement as equally inviting.
Prohibited Factors – Women
Prohibited factors also include practices that discriminate against women, including the following:
- Discounting or disregarding the income of a working wife or a single woman.
- Refusing to grant a loan, or granting a loan on different terms and conditions, because of gender.
- Requiring more (or different) information from a female applicant than a male.
- Subjecting a female applicant to a different or more extensive credit check than is usually required for men.
- Refusing to include alimony or child support as income when reasonable acceptable evidence is provided of a history of consistent payment and indications that payments are likely to continue.
- Basing any aspect of a lending decision on general presumptions about women (for example, that women of childbearing age are poor risks).
Finally, treating single working parents differently than married working parents and/or requiring a cosigner for women but not men is considered a prohibited factor.
The use of excessively burdensome qualification standards on protected classes, the use of more onerous terms or conditions with protected classes, and racial steering or deliberately guiding potential purchasers to (or away from) certain neighborhoods or areas because of a prohibited factor are all considered illegal.
Avoiding the Appearance of Discrimination
Sometimes applicants and potential applicants can perceive discrimination even when none exists. In other words, you might be doing everything lawfully and in compliance with fair lending practices but inadvertently give the impression of bias or discriminatory behavior.
It’s important, therefore, to project an image of equal treatment to everyone. Consistently equal, objective, non-biased treatment of all applicants and potential applicants ensures lending decisions are based on creditworthiness only.