It’s time for another Regulatory Refresher, this time around we give an overview of the Fair Lending regulations.

Fair Lending

The Fair Lending regulation is broke down into two separate acts; the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) otherwise known as Regulation B. Both of these acts are in place to protect consumers from unfair and discriminatory practices. The

Discrimination is categorized differently in the two acts. Below is a breakdown of what traits cannot be discriminated against in each act.

The FHA prohibits discrimination in residential real estate-related transaction based on:

  • Race or Color
  • National Origin
  • Religion
  • Gender
  • Familial Status
  • Handicap

The ECOA prohibits discrimination in credit transactions based on:

  • Race or Color
  • National Origin
  • Religion
  • Gender
  • Marital Status
  • Age (as long as the consumer has the capacity to enter into a contract)
  • Receipt of Income from a Public Assistance Program
  • Applicant’s Exercise, in good faith, of any right under the Consumer Credit Protection Act

There are different levels of discrimination under the rule known as disparate impact, disparate treatment, and overt discrimination.

Disparate Treatment:

Disparate treatment occurs when a lender treats a credit applicant differently on the basis of one of the prohibited factors. Showing that, beyond the difference in treatment, the treatment was motivated by prejudice or by conscious intention to discriminate against a person is not required. Different treatment is considered by courts to be intentional discrimination because the difference in treatment on a prohibited basis has no credible, nondiscriminatory explanation.

Comparative Evidence of Disparate Treatment:

Example. A nonminority couple applies for an automobile loan. The lender finds adverse information in the couple’s credit report. The lender discusses the credit report with the couple and determines that the adverse information, a judgment against the couple, was incorrect, as the judgment had been vacated. The nonminority couple was granted a loan. A minority couple applied for a similar loan with the same lender. Upon discovering adverse information in the minority couple’s credit report, the lender denies the loan application on the basis of the adverse information without giving the couple an opportunity to discuss the report.

Another type of disparate treatment is “Redlining.” Redlining is defined as a lender providing unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located.

Overt Evidence of Disparate Treatment:

Overt discrimination is what most people think about when they hear the word “discrimination.” Simply, it is obviously or blatantly providing or offering more favorable terms to one group versus another based solely on a prohibited factor, such as age.

Overt does not always mean deliberate as overt discrimination can be unintentional. For example, offering a loan product that has an age requirement that is different than the actual legal age requirements resulting in discrimination based on age.

Example: A lender offered a credit card with a limit of up to $500 for applicants aged 21-30 and $3000 for applicants over 30. This policy violated the ECOA’s prohibition on discrimination based on age.

Disparate Impact:

A disparate impact occurs when a lender applies a racially (or otherwise) neutral policy or practice equally to all credit applicants but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis. Disparate Impact is an unintentional instance of discrimination where the lender might not be aware of how their policies or practices are affecting applicants based on one of the prohibited factors.

Example. A lender’s policy is to deny loan applications for single-family residences for less than $60,000. The policy has been in effect for ten years. This minimum loan amount policy is shown to disproportionately exclude potential minority applicants from consideration because of their income levels or the value of the houses in the areas in which they live.

Limitation on Information about Race, Color, Religion, National Origin, or Gender:

A creditor shall not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, with a few minor exceptions.

  1. Self-Test– A creditor may ask about Race, color, religion, national origin, or sex of an applicant or any other person in connection with the credit transaction to conduct a self-test to ensure no discriminatory practices are in place. A creditor performing a self-test must disclose orally or in writing at the time the information is requested that:
    • The applicant will not be required to provide the information;
    • The creditor is requesting the information to monitor its compliance with the Federal Equal Credit Opportunity Act;
    • Federal law prohibits the creditor from discriminating on the basis of this information or on the basis of the applicant’s decision not to give the information; and
    • If applicable, certain information will be collected based on visual observation or surname if not provided by the applicant or other person.
  2. An applicant may be asked to designate a title on an application for (such as Mr., Mrs. Ms.) if the form discloses that designation as optional.

Generally, a creditor may not request any information regarding the spouse or former spouse of an applicant. A creditor may request information concerning an applicant’s spouse or former spouse that may be requested about the applicant if:

  • The spouse will be allowed to use the account;
  • The spouse will be contractual liable on the account;
  • The applicant is relying on the spouse’s income as a basis for repayment of the credit requested;
  • The applicant resides in a community property state (Michigan is not) or is relying on property located in such a sate as a basis for repayment of the credit requested; or
  • The applicant is relying on alimony, child support, or separate maintenance payments from a spouse or former spouse as a basis of repayment of the credit requested.

Childbearing. A creditor cannot inquire about birth control practices, intentions concerning the bearing or rearing of children, or capability to bear children. A creditor may inquire about the number and ages of an applicant’s dependents or about dependent-related financial obligations, provided such information is requested without regard to gender, marital status, or any other prohibited status.

HMDA Note. In regards to loans secured by a dwelling, collection of information regarding the prohibited factors may be required by HMDA. This information must be collected and reported as required. It is not to be used in the decision-making process for the loan.

Below you will find some helpful resources with more details on the Fair Lending Regulations.

Resources:

Federal Reserve Fair Lending Manual

FDIC Fair Lending Manual

CFPB Regulation B

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