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Lending Discrimination: What it Is and Isn’t

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The city of Miami, Florida is suing three large banks for alleged lending discrimination against minority mortgage applicants. The suit accuses the lenders of "engaging in a continuous pattern and practice of mortgage discrimination in Miami," and violating the federal Fair Housing Act of 1968.

The suit alleges that a disproportionate number of minority homeowners lost their homes to foreclosure due to lending practices in place from approximately 2004 to the present.

What Is Lending Discrimination?

Under the federal Fair Housing Act of 1968, it is illegal to discriminate against mortgage applicants based on their skin color, race, ethnic or national origin, religion, gender, familial status (children or no children) and disability. State and local fair housing laws may expand on the Fair Housing Act, but at minimum, all requirements of the Fair Housing Act must be met.

There are three main types of lending discrimination: overt, disparate treatment and disparate impact.

Examples of Unfair Lending Practices

Overt discrimination (on purpose and obvious), is the most easily recognized and what most people think about when they visualize lending discrimination.

Overt discrimination occurs when mortgage lenders charge higher fees, discount points and mortgage rates to borrowers because they are members of any of the protected classes described above. Predatory lenders, for example, target low-income, elderly and minority borrowers, offering them home loans with extremely high costs and mortgage rates. Predatory lenders may offer these loans regardless of the borrowers' ability to repay.

Overt discrimination can also mean denying loan approval based on membership in a protected class. Mr. Smith applies for a mortgage loan and is quickly approved without any problems. Mr. Smith refers his friend, Mr. Hernandez, to the same lender. The two men have almost identical credit scores, income and assets, and in fact Mr. Hernandez has less debt. However, the mortgage lender denies Mr. Hernandez' mortgage application stating that his debt-to-income ratios are too high.

Another overt form of lending discrimination can occur when applicants are discouraged from applying for a loan in a certain area, or are steered toward another lender or neighborhood. Here's an example: "You know, Mr. Esperanza, I'm afraid we can't help you here, but you might give Mr. Diaz at First Fictional Bank a call. He is more familiar with that neighborhood and all."

Disparate treatment is discrimination that doesn't involve denying loans to protected applicants, but does make borrowing more difficult. For example, Tom and Julia Watson, a mixed race couple, applied for a mortgage together and were surprised to be asked for a copy of their marriage license. None of their white married friends who applied with that lender were asked for this. This is disparate treatment because the non-mixed-race applicant couples were taken at their word and not required to prove they were married.

The most subtle discrimination practices aren't intentionally discriminatory. For example, Miss Hannah Summers, a new college graduate, applied for a $60,000 condo mortgage with National Bank and was told that the lender does not fund mortgages in amounts lower than $100,000. Although Miss Summers is white, the lender's policy disproportionately affects minorities in her town because it's mainly in their neighborhoods that the home prices fall below that $100,000 threshold. The lender's policy unintentionally limits the availability of mortgages to minority applicants in that area. Disparate impact doesn't violate the law, however, if the policy that causes it has a legitimate business purpose and that there is no less discriminatory solution.

It's important to understand that mortgage lenders can request information about your credit, employment, and income to determine how much you can qualify to borrow, and that in community property states, a non-borrowing spouse's credit may be relevant,

Compare Multiple Mortgage Quotes to Combat Discrimination

If you're looking for a mortgage, compare competing mortgage quotes to find your best home loan. The more quotes you compare, the more easily you can avoid lenders that discriminate — their offers just won't stand up to their competition.

If you believe you've been a victim of lending discrimination, help is available. The U.S. Department of Housing and Urban Development ( HUD) investigates violations of fair housing and lending laws and provides information and complaint forms online.

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