What Is Lending Discrimination?
Lending discrimination occurs when a lender makes a decision during the mortgage application process based on a person’s race, color, sex, religion, familial status, nationality, age, receipt of public assistance or disability. Though fair lending laws are designed to protect borrowers from mortgage discrimination, it can still be a barrier to homeownership for marginilized groups. It’s important for consumers to understand mortgage approval guidelines so they can protect themselves from unfair lending practices.
Lending discrimination explained
Lending or credit discrimination happens when a lender takes action or makes a decision related to a mortgage for reasons other than the borrower’s creditworthiness. For example, denying an application or raising the APR on a home loan for a property in a “majority-minority neighborhood” would be mortgage discrimination, as would treating borrowers differently because of their sex, including their gender, gender identity and sexual orientation.
Lending discrimination can also occur in other parts of the home mortgage process, such as home appraisals, homeowners insurance policies and mortgage modification.
Ralph DiBugnara, real estate expert and founder of homebuying resource Home Qualified, says the guidelines that lenders use in underwriting are publicly available, so it’s no secret what lenders are looking for. “We all kind of go off the same guidelines that are governed by Fannie Mae, Freddie Mac and Ginnie Mae,” he says. “So if you have somebody who fits those requirements and you’re not approving them for other reasons, then I would definitely consider that lending discrimination.”
Things you should know
There are two federal laws that protect consumers from lending or bank discrimination: The Equal Credit Opportunity Act (ECOA), which is enforced by the Federal Trade Commission (FTC), and the Fair Housing Act (FHA), which is enforced by the U.S. Department of Housing and Urban Development (HUD).
Creditors are prohibited from taking any of the following actions based on an applicant’s protected class:
→ Denying a home loan
→ Persuading an applicant not to apply
→ Charging higher interest rates or fees
It’s also illegal for lenders to ask you about your familial status or family plans other than your marital status.
Three lending discrimination types
There are three types of lending discrimination:
→ Overt
→ Disparate impact
→ Disparate treatment
Overt lending discrimination is blatant and typically easy to recognize. For example, if a mortgage lender refuses to consider Social Security income for a person with a disability, that would be overt discrimination.
“Disparate treatment can be considered the most common form of lending discrimination. It is differences or inconsistencies in treatment based on prohibited factors,” says Tabitha Mazzara, Director of Operations for mortgage lender MBANC. According to the ECOA, if a lender takes longer to approve “minority loan applicants” or fails to provide them with the same options or assistance that they provide to “non-minority applicants”, that would be disparate treatment.
“While disparate treatment is the result of inconsistencies, disparate impact involves consistency,” Mazzara explains. “Disparate impact is where consistent application of a policy results in an adverse impact on a protected class.” Regardless of intent, if a mortgage lender’s policy has a disproportionate negative impact on a protected class, it can be considered a form of lending discrimination.
How to protect yourself from lending discrimination
Understand mortgage approval guidelines
Take a look at the Uniform Residential Loan Application to get an idea of what kind of information you’ll need to provide to the lender and learn how mortgage rates are determined. Then, do research on Fannie Mae, Freddie Mac and Ginnie Mae guidelines to better understand what financial factors could preclude you from getting a mortgage. For example, DiBugnara recommends looking up questions, such as:
- What are a lender’s credit score requirements?
- What are their income requirements?
- What are their asset requirements?
You can often find the answers to your questions on public websites maintained by the lenders or on government agency websites, says DiBugnara. For example, he recommends doing a Google search of phrases, such as: “Fannie Mae guidelines for credit score” or “Fannie Mae guidelines for income.” That can help you better gauge what to expect. He also says you can call mortgage banks and ask: “Hey, what do you use to qualify? What credit scores do you use to qualify? What is the lowest credit score you use to qualify?” Asking these questions will help you determine if a decision or action taken by a lender constitutes lending discrimination.
Look for red flags
Mazzara says to “watch for warning signs such as being treated differently in person than on the phone or online, being discouraged from applying for credit or being refused credit even though you qualify for it based on advertised requirements.” Lending discrimination is still common — for example, mortgage denial rates are higher for Black borrowers in the 50 biggest metro areas — so it’s important to keep an eye out for any unfair practices.
Ask for assistance
The mortgage process can be confusing, and even if you’re not worried about mortgage discrimination, having an advocate can help you secure the best rates and terms for your home loan. Consider consulting an HUD-approved housing counseling agency for advice and guidance as you shop for mortgages.
Compare multiple lenders
If you only get one quote from one mortgage lender, you may not be able to identify whether lending discrimination is occuring. Furthermore, checking your rate with a handful of lenders can help you save money over time. Even if one lender offers you an APR that is only 0.1 percentage points lower than what another lender offered, that could mean a difference of thousands of dollars over the life of your mortgage.
What if you’re a victim of lending discrimination?
Speak with your lender’s manager.
DiBugnara says it’s not a bad idea to first call customer service and report the problem. “The customer at this point has more power and ability than they’ve ever had because of review websites,” says DiBugnara, “So I think banks are very conscious about what their online reputation is.” If you mention that you might leave a negative review on one of those sites, the lender may do something to resolve the situation.
File a complaint with the Consumer Financial Protection Bureau (CFPB).
“The scariest words for a lender to hear would probably be, ‘the CFPB wants to talk to you about your lending practices,’ so if I was a customer, I would probably start there,” says DiBugnara. You can submit a complaint online or call 855-411-CFPB (2372). The CFPB’s contact center is also set up to take calls from consumers who are deaf or hard of hearing, have speech disabilities or prefer to speak in a language other than English. In addition, the CFPB offers a toll-free teletypewriter (TTY/TDD) line at 855-729-2372.
File a complaint with the U.S. Office of Fair Housing and Equal Opportunity (FHEO).
You can file a complaint online, submit a form through email or snail mail or call to speak with an intake specialist at 1-800-669-9777 or 1-800-877-8339. HUD also offers a TTY/TDD line at 1-800-877-8339. If you would rather speak with someone local, FHEO also maintains a contact list for regional FHEO offices, as well as region-specific email addresses for civil rights complaints. You can also contact a regional FHEO office for help if you have limited English proficiency or need disability-related assistance. The FHEO’s online complaint system currently only accepts complaints in English or Spanish. But PDF forms with information translated to Arabic, Cambodian, Chinese, Korean, Russian, Somali, Spanish and Vietnamese are available. In addition, the FHEO offers other accommodations, auxiliary aids and services to persons with disabilities and to those who have limited English proficiency.
Contact your state attorney general’s office.
Mazzara says to “check the website of your state attorney general’s office for information about your state’s equal credit opportunity laws. You may be able to see if the creditor violated state laws.” If the lender has violated state laws, that’s something that your state’s licensing agency should know about.
Contact a lawyer.
“You can also consider suing the creditor in federal district court,” says Mazzara, especially if you’ve incurred damages. “Or you might consider finding other people with the same claim, and get together to file a class action suit.” Pursuing legal action is totally optional, but it may help put an end to a nefarious practice.